Okay, I lied. Again. But I will get to the “good” flat fees (versus AUM fees) the first chance I get. However, the comments to my last blog (What Do Advisors Really Do Anyway?, July 15) are crying out for a response, and I just don’t seem to have the will to resist.
Before I get into that, let me say up front that while I don’t believe that I’ve met either Derek Tinnin or Elliott Weir (who commented on my last blog) I’m assuming that they are smart guys, and good, client-centered advisors. Which leaves me even more puzzled as to why the key points of their comments make absolutely no sense to me. Either they are cooking on another planet or I am, and perhaps after I tell you why, maybe they or some other reader(s) can enlighten me.
Let’s start with Elliott Weir’s shorter comment, which reads in part: “Bob, in a way you disproved your own thesis. Of the three values you cited (protecting clients from themselves, protecting them from bad products/services, and preventing them from making big mistakes), none of them has any connection to the size of the investment account.”
As I said, I’m baffled by this statement. In fact, I’m so baffled that I’m having a hard time formulating a cogent response. To my mind, the connection between these three “key services” that financial advisors provide and the size of client portfolios is obvious, but I guess not. You see, if a client makes any investment “mistakes” (which most lay investors are inclined to make, but more on that later), the size of their portfolios will decline, which means the compounding of their investments will be reduced as well, rendering their long-term portfolios smaller, and their retirements less well funded.
To my mind, it is this simple, but essential, fact that makes fees based on assets under management by far the most client-centered form of advisor compensation: it squarely aligns the clients’ primary interest—to grow their portfolios as much as possible, within an acceptable level of risk—with their advisor’s financial interest in earning more fee income, also by growing the investment portfolio.
As I’ve written before, this is how the wealthiest people in the world pay for their financial advice: it just makes sense.
For his part, Derek Tinnin also takes issue with this concept, as well as the notion that most lay investors, left to their own devices, will make the serious investment mistakes I listed.
First, Derek addresses my comment that I wish the other professionals in my life were compensated based on performance, as is my financial advisor: “Bob, are you aware that it’s illegal for your accountant to charge based on performance (how much tax they save you)? Why is that? Conflict of interest or “bad behavior” by the accountant, perhaps? The same thing with your doctor: Do you really want to pay them based on your life expectancy or other metrics that once again introduce very questionable conflicts?… …doctors, lawyers, and accountants get paid on the quality of their work…”