Are advisors overpaid?
I offended an entire table of fellow financial advisors while attending a conference last year when I made this statement: “Everyone at this table makes too much money relative to what we do.”
I went on to explain that in no other profession do service providers have the luxury of basing their prices on what their clients can afford to pay. Imagine a lawyer with one hourly rate for one group of clients and a higher rate for another group. A doctor who charges a higher copay to his patients who make more money.
I passed my first securities exam in 2000. At the time, financial advisors were charging an average fee of 1% to their clients for investment advice. Twenty years later, many advisors are still charging similar fees — a recent study by RIA in a Box, that surveyed 1500 firms, found the average advisory fee charged to clients was 0.95%.
Since 2000, there has been tremendous fee compression in financial services generally. I remember hearing stories from older advisors of the good old days, when equity trades cost 12 cents a share — a 1,000-share order would cost $120 (not to mention the minimum ticket charge for small orders). By 2000, that $120 order cost $19.95. At the beginning of 2019 the cost was $4.95 and today it’s $0.
In the managed money world, there are now more assets under management in low-cost equity ETFs than higher cost equity mutual funds.
There is a race to the bottom occurring outside financial services as well. Amazon is pushing prices lower and in the process forcing traditional retailers out of business. Planet Fitness charges a fraction of the fees charged by Bally’s 20 years ago. I could go on.
As a financial advisor, I always relished the fact that clients will pay a premium for good advice. But how much of a premium will they pay and for how long?
We all know that robo advisors are really robo investors and that there is no replacement for financial planners. However, as they push fees for investment advice lower, they are causing clients generally to devalue investment advice. Even if clients avoid using them, the knowledge that there are less-expensive options makes part of what we do seem less valuable.
Despite the impact of fee breakpoints for larger clients, there are some clients who pay two times to three times what other clients pay for very similar advice and services. When you look at our compensation per hour, there is huge variability in the rates charged to our well-heeled clients when compared to the clients who barely meet our minimums.
In other words, our wealthier clients are supplementing our less-wealthy clients. Sometimes our lower-wealth clients take up way more of our time than our wealthier clients — which further exacerbates this pricing inequity. As long as clients value what we do for them, none of this matters. So our job is to make sure we are delivering value.
Let’s assume the average price in the marketplace for a solid comprehensive financial plan is $10,000. This makes a lot of sense for the $1 million client who is paying a fee that equates to 1%. It may even make sense for the $2 million client to pay $15,000 to $20,000 for a similar service. But once you get above $5 million, it becomes a head-scratcher. Why should this client pay $25,000 to $50,000 for a financial plan? And why should any client pay us more than $100,000 per year?
They do it today because it’s always worked that way. How long will this trend continue? And will their children who inherit their wealth be willing to work under this same fee arrangement?
There is a wave of financial planners completely turning the fee model on its head by charging flat fees. They would take a $10 million client and charge a flat of $10,000 or $20,000 and then use a robo-type process to manage all or part of the investment portfolio. This implies that the highest amount of fee compression will occur in financial planning at the ultrahigh-net-worth end of the market. It’s one of the reasons why family offices exist — wealthy families added up all of the money they were paying to advisors and decided to do things differently. They figured it would be cheaper to hire their own staff, rent or buy their own offices and pay for their own technology.
There is an old adage which says “price is what you pay, value is what you get.” The answer is not to lower your fees or to pivot to a flat-fee model. We have to explore ways to deliver more value.
- Watch your service levels and service standards. My firm recently instituted a series of service standards for routine requests like responding to emails, returning phone calls or completing client research requests. Each of these service items has a “standard” response time and an “excellent” response time. To maintain these standards we had to invest in more staff and train them to focus on delivering these standards.
- Give your clients more technology. Not every client will use the online portals, apps and calculators we have access to, but the ones who do will find them tremendously valuable.
- Develop a calendar. My firm recently implemented a financial planning calendar to ensure we are consistently and regularly discussing financial planning topics with every client each month/quarter, as opposed to the lazier way of conducting financial planning on-demand.
- Maintain better communication. Send your clients articles from time to time — not just on financial topics. Perhaps suggest a biography to read or a restaurant to consider. Remember — part of what the clients are paying for is a relationship with someone who understands them beyond their money.
- Create experiences. My firm will be rolling out targeted client dinners this year with groups of clients with similar interests and backgrounds. We are also researching games and activities for their children to learn about financial stewardship.
- Take better notes. The CRM we implemented a few years ago helps us remember the personal details of a client’s life way better.
- Focus on life goals, not just financial goals. It’s as important for us to understand “why” they want to achieve certain goals as it is for us to understand “what” they want to achieve. If you can make your client’s actual life meaningfully better (as opposed to just their financial life), you have landed a client for life.