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Practice Management > Compensation and Fees

Financial Advice and the Age of BS

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In my view, future historians will regard the current era as “The Age of Horse Hockey” (I use this term because this is a family website, but feel free to replace it with your phrase of choice). Partly driven by the demise of ethical standards, and the internet, which provides a forum for anyone to share any thought that passes unfiltered through their minds, people are free to make entirely groundless attacks on others, or equally unsupported—and unsupportable—claims about, well, anything. And they do. 

A current case in point of relevance to the independent advisory community are the continuing attacks on AUM compensation by the proponents of a flat earth, ah, I mean, flat fees. Today, I’m specifically referring to comments made by financial planner, NAPFA founder, and long-time CFP Board critic, Jim Schwartz, who wrote in a recent email blast:

“Now [in] 2016, facing commoditization and compression of assets under management fees, if asked [by an advisor] how to transition to bracketed and flat fees, my #1 advice would be to tell clients from the late ’80′s (though I doubt they are still around): ‘Remember in the ’80′s when I was going to fee only [and I said that] I wasn’t going to [cheat] you [Schwartz’s language was a bit stronger—remember the family site thing—so feel free to insert your own epithet here] any longer? Well, I’m really really not going [cheat] you this time. And I mean it cross my heart and hope for resurrection: in 6 months or a year my compensation will be a bracketed fee for a plan and flat monthly fee [for advice]. And, to those not from the ’80′s, and assuming now the majority of the clients in the practice have been there 5 years or less on average, you can go with” ‘in 6 months or a year…I won’t be [cheating] you any more…’”

I mean, for real? Asset management fees are “cheating” clients? Really, Jim? Now, I understand why some advisors today believe that charging flat fees are a better business model: because their revenues are no longer tied to market declines, which shrink portfolios and fees. And a growing number of baby-boom-age clients are reaching retirement age, and consequently, depleting their portfolios, along with their fees. (Although this may not be actually happening: see my August 24 blog “The Me Generation Becomes the Investing Generation”). Yet, these are reasons why flat fees may be better for advisors—not for their clients.

On the clients’ side of the equation, as I understand it, proponents of the (better for advisors) flat fees criticize AUM fees for allegedly creating conflicts with the interests of the clients: Paying down one’s mortgage, or investing in non-portfolio assets such as a business, would reduce an advisors’ AUM compensation, and therefore may be discouraged by an advisor. 

But as I’ve written before: Horse hockey. Reality is that it’s in a client’s best interest to grow their retirement portfolios. So in these cases, their advisors’ interests are clearly aligned with those of the clients. The conflict occurs when clients have the inclination to spend money rather than save and invest it, which is usually not in the client’s interest at all. Pay down their mortgage at 3%, when the stock market is generating 7% to 8% a year? Or buying a vacation house vs. renting for a few weeks every year? Or investing in a niece’s new Zombie clothing line? Is it really a conflict with a client’s interest to get talked out of these things? 

With that said, the advisor still doesn’t prevent clients from doing any of these. Instead, she/he simply reminds the client of the potential consequences of doing them versus the wisdom of continuing to invest for the future. That argument is something that many clients need to hear, but they don’t have to heed. 

Conversely, what incentives do flat fee advisors have in these cases? If anything, it would be to agree with the client about whatever crazy thing they want to do. That way, the client will like the advisor, and continue to pay her/his flat fee—which of course will increase as a percentage of AUM as the portfolio declines. I have yet to hear of a flat-fee advisor reducing their fees because a client’s portfolio declined.

So, who exactly is really [cheating] their clients?