I got an e-mail recently from an old friend who’s a CFP and a CPA. He was lamenting the fact that most financial planners still don’t get paid directly for financial planning, and blamed those economics for what he perceives as a widespread decline in comprehensive financial planning throughout the industry. While there’s some truth in both those assertions, I see things a little differently.
It’s true that very few advisors these days make a living charging fees for financial planning. But they don’t survive on selling products anymore, either. Asset management fees are a much better way to get compensated than limited partnership revenues. What’s more, true wealth managers and private banks don’t make money on their advice either, and they don’t sell product: they charge AUM fees, too. That’s worked well for the wealthiest, most sophisticated private investors in the country for 200 years. The idea of comprehensive financial advice is a good one, but it’s only within the past 15 years that we’ve arrived at the right economic model to pay for it. A percent of AUM seems to be as good as any other model.
Now for the second point, that little comprehensive financial advice is being done when the emphasis is on AUM. It’s well known that clients didn’t read the voluminous, labor-intensive financial plans of the past, yet equally well accepted that comprehensive advisors attract and retain clients more easily than pure investment managers. Most advisors these days solve this problem by making sure clients cover the bases (insurance, a will, a tax accountant), focusing on the services clients can’t get anywhere else: impartial portfolio management that’s tailored to their needs, budgeting, retirement planning, college planning, and lately, trust services for wealthier clients.
Is this a bad thing? Not if the clients get good advice for all their needs. If financial planners only take responsibility for the services they offer, and leave clients to the mercy of the financial services industry for the rest of their needs, then maybe it is. Would charging directly for financial planning solve this problem? Only if you could persuade people to pay for it. Which, historically, is an uphill struggle. Rather than scrap the AUM fee thing, perhaps advisors should focus on standards for the minimum acceptable client service. The difference between salespeople and professionals is telling people what they need to do, rather than just what they need to hear.