What You Need to Know
- No single fee model fits every advisor and client.
- Asset management costs have shrunk more than advisor fees, says Penny Phillips of Journey Strategic Wealth.
- Some firms are overcharging clients.
A lot has been said in recent years about fee compression and new fee models for investment advisors, but not every fee model works for every RIA firm and every client, according to the founders of three RIA firms who spoke Wednesday in an online “Discussion on RIA Fee Practices and Trends.”
“I’ve always been a stickler on fees of all types,” including mutual fund fees, where some firms “charge way too much money for what they do,” said Rick Ferri, CEO and founder of Ferri Investment Solutions in Georgetown, Texas.
He started the firm in 2019. For a flat $925 fee, he helps clients set up a portfolio, he explained, noting he then charges an hourly fee if they need more help.
A portfolio with index funds “outperforms 95% of all other strategies,” so he is strongly in favor of his clients having an “all index fund portfolio,” he said.
The average client does not need a financial plan every year, so a charge of $2,500 to set up the plan and then $1,000 a year for advice if the client has $1 million in assets seems to be a fair fee structure, he said.
So why, he asked, do typical advisors charge a 1% fee that comes out to $10,000 a year? How can they charge that much money and “call themselves a fiduciary at the same time? It just strikes me as being a little bit hypocritical,” he argued.
Although Ferri has experience with the various fee models, the hourly fee model is “clearly the most fair” because 90% of the charge should be based on the amount of time dealing with the client directly, he said.
“I can’t imagine anything being more fair than that,” he explained. “As a fiduciary, my role is to ensure that the clients are paying fair fees, and everything that I do based on the amount of my time and the amount of effort I have to put forward with the client and an hourly model is just about the fairest you can get.”
An advisor must be paid a fair wage — “you need to make a living, and you should make a very good living,” he said. “$150,000 to $250,000 is a fair [annual] wage for an advisor if they’re really advising. It aligns very well with the hourly model.”
AUM Fee Pros and Cons
However, Penny Phillips, president and co-founder of Journey Strategic Wealth in Summit, New Jersey, said: “I don’t love the hourly fee structure” because it is difficult for an advisor actually providing financial guidance and meeting with clients by phone and in person to fairly capture the amount of work you are actually putting in with that model.
But it depends on the business, she said.
Ferri said that he had used a fee structure based on assets under management at a former business. “When you’re doing AUM, you can build assets under management and you can create wealth in the business,” he said. “You can sell that.”
Phillips and Anna N’Jie-Konte, founder of Dare to Dream Financial Planning in Silver Spring, Maryland, agreed with Ferri that some firms overcharge their clients.