What Do Advisors Really Do Anyway?

2) Advisors protect their clients from the financial services industry. Now, before I get a flood of angry emails, I know that there are many “client-centered” financial services firms out there. But with that said, I think we can all agree that there are powerful financial incentives to charge high fees and loads, and other hidden costs, in order to generate more profits for their shareholders. And some firms do succumb to these pressures—especially when the vast majority of financial consumers are both trusting and woefully ignorant of how the business really works. Again, if a financial advisor does nothing more than keep the costs of their clients’ investments and other financial products on the low side of the spectrum, they will have more than earned their fee.

3) Advisors try to prevent clients from making one or more devastating personal financial mistakes. I would have said that advisors offer “two primary benefits,” but years ago, Columbia, North Carolina financial planner (and former NAPFA chair) James Wilson shared with me his insight that the three most financially devastating events for clients are: divorce (the client loses half their assets); dissolution of a business partnership (they lose half or more of the equity and earning power they’ve spent their life building up); and investing in high-risk, passive “business” opportunities. Of course, no financial advisor can prevent their clients from taking any of these actions. But according to Wilson, simply laying out the effects that each of these potentially would have on a clients’ financial future is often enough to keep them from taking these decisions lightly. And you really can’t even put a price on that kind of advice.

So, while Tinnin is right that “markets produce performance,” he has completely overlooked the fact that clients can only benefit from that performance if they are a) in the markets; b) not reducing their performance through excessive fees and loads; and c) not decimating their investment portfolios through poor life decisions. What’s more, from this perspective, even his (and many other flat fee proponents’) assertion that viewing AUM fees as incentives for advisors to grow client portfolios is “flawed” loses steam. While an AUM fee advisor certainly has a conflict when asked by a client about investing directly in a “business opportunity,” that’s not a bad thing because most business opportunities are bad ideas. Even if an advisor’s response is a knee-jerk “don’t do it,” at least that might get the client to make absolutely sure they want to make that investment: Where’s the harm in that?

The bottom line here is that AUM fees put advisors on their clients’ side of the table in many ways: to capture market performance; to keep costs and expenses down; to refrain from making major life decisions lightly; and to think twice about risky private business ventures. This is why the wealthiest investors happily pay AUM fees and why advisory clients should, too. Frankly, I only wish my other professionals—doctors, accountant, dentist, etc.—got paid on their performance, rather than the same amount no matter how my life turns out. And I promise I’ll talk about “good” flat fees next time.