Advisor Practice

Not Just Another Commentary on the Changing Business of Giving Advice to Individuals

InvestmentNews recently published an article written by Jeff Benjamin.  The article covers a lot of ground that has been well trod over the last ten years regarding the services offered and fees charged  by financial advisors.  Mr. Benjamin makes a coherent case for the consultant model for the industry.  Along the way, however, he exposes two truths the industry avoids airing at all costs.

In support of his suggestion to unbundle services, he writes:

The fact is that the investment management part has become a cheap commodity that most regular people are already doing in their own retirement plans and probably don’t even realize it. I’m reluctant to say this out loud for fear of having my picture pasted on dartboards at advisory firms across the country, but anyone with basic math and reading skills should be able to manage their own investment portfolio in 2022.

Ubiquitous robo-advisors and indexed ETFs charging 5 basis points create an environment which allows the lay person to manage his own portfolio.  The statement may be overly broad, as ultra high net worth individuals may benefit (in the sense of value received in excess of costs incurred) from professional management.  And these benefits are primarily in risk control and tax management, not investment performance.  An advisor will be hard pressed to generate 100 basis points of performance over what a client could do for himself in his $500,000 portfolio.

“But wait,” cries the advisor.  “The fee covers all of the other work I do for the client, as well as investment management.”  Which brings us to the second truth:

Whether charging
hourly, flat-fee, retainer or even a fee tied to net worth or income, the absence of an investment account to draw quarterly fees from forces a full and open presentation of an actual bill for service. 

Let’s be honest, that kind of clear and candid reality around fees is still rare in the wealth management space, even among those touting their status as fiduciaries.

Advisors have difficulty justifying their fees to their clients for many reasons.  Some of the work product is not quantifiable (risk control).  Some is difficult to verify (terminal account values of before-tax versus after-tax investments).  There is a portion of the consumer advocate press that is actively hostile to the advice profession.  And we have to admit that there have been more than a couple of high profile cases in which the public trust was abused.

But if the industry is to become accepted as a profession beside attorneys, physicians and accountants, it will have to adopt transparent and justifiable fee schedules for an unbundled menu of services.  Those that don’t will remain well-dressed salesmen.