Stop pricing fees like airline tickets
Funny, but have you ever noticed wealth management is beginning to look a lot like the airline industry when it comes to fees?
Flyers will do a quick search on the internet, but won’t read the fine print. They find the lowest published fare of a plane ticket, but don’t notice the fees for baggage, fuel surcharges and printed boarding passes. As advisors, we look at near-zero ETF fees and single-digit passive fund expense ratios, but forget to pay attention to custody, paper statement, IRA, strategist, platform, account opening and closing fees. I read about instances when custodians are discussing flat or heavily discounted transaction fees, only to uncover the fine print that forces clients to park their cash in extremely expensive money market funds.
Over the last few years, since the Department of Labor’s now-defunct fiduciary rule, it seems the industry has been touting its drive to lower fees, but do clients and even advisors really understand what they are paying and are fees really that much lower when you add in all the additional costs?
The custodians are going to have to figure this out — before regulators demand it.
Advisors can’t give one thing away only to overcharge for another in the same portfolio. Fees need to be simple and understandable. Maybe a simple basis point charge with a cap. Or, a fee that separates out the product from the custodial work, and therefore, discloses the potential conflicts of the custodian and investment product manufacturers.
For the advisor, it is not enough to say you chose the lowest-cost product. The race to zero in advertised product costs doesn’t usually include other costs that quickly add up. At the end of the day, it would be the total cost that the client pays, among other factors, that will impact the outcome of the clients’ goals.
Advisors have to consider the overall costs and benefits to the clients. To that end, I would argue the traditional AUM fee, which rolls the planning, service and investment oversight into one comprehensive fee, is an issue as well. Sure, it is easy for the client to understand and the advisor to sell, but that leaves a major disconnect between what the client values (advice, time, planning) with how they are charged (value of their account). AUM fees, even those built in for planning, that are tied to the markets, will be judged by the performance of their underlying investments.
Some of the largest and fastest-growing economies in the world are still considered emerging markets.December 20
If the service an advisor provides is valuable, clients will pay for it.
I didn’t choose the big discount airlines with their multiple add-on fees for my family’s upcoming summer vacation. I chose the one that I knew would service us better and with more transparent fees. I didn’t have to check through the fine print on the back of my ticket — clients shouldn’t either.