The way an advisor charges a client has been rehashed many times on a number of different blogs, so I won’t get too far into explaining each and every option. Recently, there have been some advisors bucking the norm. The norm for advisors has been to charge a percentage of assets under management. Some advisors have bucked this trend and have been charging a flat fee no matter how much an individual has under management. There have been some recent blog posts about why charging a percentage of assets under management is not in the best interests of the client. I agree and disagree to a certain extent.
In my mind to charge a fee based on assets under management aligns an advisor’s interest with the client’s interest. If the portfolio appreciates, the advisor gets a raise. If the portfolio depreciates, the advisor gets a pay cut. Pretty simple, right? Well, I believe the more difficult issue comes about when you look at what each client is receiving for the percentage they are paying for the management of their assets.
Let’s take an example. Mr. Smith pays his advisor 1 percent to manage his $500,000 portfolio, so he pays $5,000 per year for the services. So, what is Mr. Smith receiving for $5,000 he pays his advisor? Mr. Smith is receiving a portfolio of mutual funds that the advisor has researched and chosen and thus outsourced the management of the portfolio to these funds. So, for $5,000 Mr. Smith is paying his advisor $5,000 to be a manager of managers, be invited to play golf, and receive a call a couple times a year to stay in touch. This scenario plays out over and over again in the wealth management business. So, for the most part I agree with the argument that an advisor should be providing more for the fee he/she is charging their client.
Some firms have been incorporating financial planning into their pricing model, which provides a great value to many clients that are looking for that service. Financial planning can get very expensive and to provide that service as part of the management fee is a great value in my opinion. On the other hand, my firm provides a different service because my firm targets a very specific demographic: business owners and entrepreneurs. Financial planning is not the most important service that they are interested in being provided. We wear many hats for our clients. We can and should be thought of as investment managers, business consultants, tax strategists, and estate planners. These are the services that are most important to our clients. We provide value over and above just managing our client’s money. Our clients need someone to answer questions and provide relevant answers that relate to their business and effect their personal life. Some frequently asked questions are; What accounts should we open and fund to save on taxes? Who can you introduce us to that would benefit our business? How should we structure our business going forward? What assets should be held in trust as we become more successful? Can you review an investor deck and give me your opinion? Etc.
These are the questions we get asked and these are the questions we are prepared to answer. We try to provide the very best guidance for our clients. We work with our clients throughout their personal and professional lives. We are successful if they are successful. Providing our clients with these ancillary services allows us to be part of their team. If our clients were to go out and hire a firm to answer these questions or to help them to strategize, the out of pocket costs would be prohibitive for most and time consuming to find the right fit. We not only provide our clients the benefit of using our resources and capabilities to build their businesses, but we help them to cut the fat and simplify their personal and professional teams.
If you’re considering working with an advisor make sure you ask the question of, “what services are you providing for the fee that I’m paying.” If it doesn’t add up or if the ancillary services don’t fit with your needs, move on. There are some great firms our there that will fit your requirements, it just takes a little digging. Fees aren’t everything when you pick an advisor, but they are certainly a big factor when considering what you receive in return for the fee you pay. So, do your due diligence. There’s someone for everyone.