“If your incentive is to get paid, the way you’re paid will determine subconsciously the advice you provide,” argues Rick Ferri, founder and CEO of Ferri Investment Solutions, in an interview with ThinkAdvisor. “Incentives drive advice — always have.”
Ferri, 63, who was a financial advisor for 32 years, is attempting to influence new, young FAs to separate advice-giving from portfolio management in structuring their compensation. In other words: Don’t charge a fee — like the prevalent 1% — based on assets under management.
“It’s a conflict of interest for an advisor to provide both advice and portfolio management,” Ferri asserts.
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In the interview, he discusses what he sees as fairer alternatives.
The chartered financial analyst and fiduciary is a consultant to both individual investors and, under a separate umbrella, to advisors. He charges each $450 an hour.
Index fund-oriented, he gives advice chiefly to do-it-yourself investors seeking confirmation as to whether they’ve been managing their portfolios well; and he helps pre-retirees with distribution planning.
Ferri’s interview podcast, “Bogleheads on Investing” — supported by the nonprofit John C. Bogle Center for Financial Literacy — garners 30,000 downloads a month.
For investor clients, he provides what he calls “financial planning lite,” but which nonetheless includes substantial tax and estate planning guidance.
He started as a broker at Kidder Peabody, later moving to Smith Barney when Jamie Dimon was president.
He founded RIA Portfolio Solutions in 1999, selling the firm to an equity investor 18 years later, in 2017, and forming Rick Ferri LLC. Two years after that, he launched Ferri Investment Solutions.
ThinkAdvisor recently interviewed the candid consultant, who was speaking by phone from his Georgetown, Texas, base.
He argued that advisors should not be entitled to a percentage of gains made in a client’s portfolio, just as a CPA isn’t entitled to part of a client’s tax refund.
He then discussed “the last bastion of gluttony in the investment industry,” followed by his forecast for active managers’ performance (think actively managed ETFs).
Here are highlights of our interview:
THINKADVISOR: By calling for advisors to unbundle advice from portfolio management, are you fighting a one-person battle?
RICK FERRI: No. There are a lot of other people saying this, a whole network trying to evolve the industry; we’re not trying to change it.
You can’t change the advisors who are charging 1% and those who are doing commission business.
But a lot of them are going to eventually get less business because of the evolution in how advisors charge.
You say it’s a conflict of interest to both provide advice and sell product, and provide asset management services. Why is that a conflict?
If your incentive is to get paid, the way you’re paid will determine subconsciously the advice you provide. If you’re selecting a product you get paid a commission on, for example, your recommendation to the client will be to your own benefit.
You’re going to convince the client one way or another to do what’s in your best interest. That’s where the conflict comes in. Incentives drive advice — always have.
Do you think advisors are charging fairly for their services?
Most are charging way too much. This is the last bastion of gluttony in the investment industry.
For years, I managed a portfolio for a quarter of a percent, and we had a 30% profit margin.
How in the world advisors in good conscience charge clients 1% or 1.5% per year for literally the same thing is beyond me.
If they have a client with a million-dollar 401(k) rollover and charge them $10,000 a year to manage that portfolio and charge another client with a $2 million portfolio $20,000 if they roll over, what is the advisor doing differently? The answer is absolutely nothing.
And if the $1 million portfolio grows because the market grows, now the advisor will get paid $20,000. Why should they get paid $10,000 more a year because of that? The answer is, they shouldn’t.
Are you trying to convince most advisors to unbundle their fees?
I know I’m not going to turn a 1% AUM advisor into an hourly advisor or a fixed-fee advisor charging an annual $8,000 or $9,000 to manage money and give advice regardless [of] how much the client has.
I’m trying to influence the new, younger advisors who haven’t yet decided how they’re going to structure their compensation. Charging 1% AUM is not the way to do it.
What’s the better way?