Fees Are Important, but so is Finding the Right Advisor For You
The financial advisory business is in flux, and that’s a good thing. More & more advisors are realizing that charging for their services based on how much money a person has under management with them (“AUM”) doesn’t make any sense. Other advisors want to provide valuable advice to clients without having to manage their investments (“advice only”). Better yet, consumers in search of financial advice are becoming more educated.
I founded Verbatim as a flat fee advisor in February, 2020. Though far from the first flat fee advisor out there, only a few short years later I feel like a veteran, and the recent attention on the advice-only fee model made me think it’s a good time to revisit a blog post I published in May of 2020 called, “What Most Financial Advisors Don’t Want You to Know.” A touch wordy, but I had a lot to say about fees & the way most of the industry charges them.
I subtitled the post, “Why ‘Fiduciary’ is Often Just a Fancy Word for Marketing,” which feels as relevant as ever. If you can find a financial advisor’s website that doesn’t mention, “fiduciary,” a dozen times for the Google search algorithm, send it my way. RIAs, or Registered Investment Advisors, are supposed to be fiduciaries by design, acting only in their clients’ best interests, but I always say the same thing, “if the firm’s model is structured correctly, there should be no question as to whether they are acting in a fiduciary capacity.” IMO, that fiduciary responsibility starts with the way fees are charged, and even whether an advisor should work with a prospective client.
At some point every advisor will be contacted by someone who thinks they need an advisor, but either does not, or isn’t at a point in their lives where paying an advisory fee makes financial sense. Anyone who takes fiduciary responsibility seriously should be honest with the prospect, rather than onboarding a new client inappropriately, and I believe most financial advisors do just that. For decades, that was enough. Now that there are flat-fee and advice-only advisors available, wouldn’t it also be in the client’s best interest to recommend a fee model that makes more sense than one that charges them a percentage of assets under management? I believe the answer to that question is, “yes.”
Another term you may hear when looking to work with any professional is, “conflicts of interest.” A conflict of interest occurs when the client’s interest is not aligned with the professional’s interest, and conflicts of interest under the AUM pricing model may be the most damaging to clients’ well being.* How might these conflicts come about? An advisor operating under the AUM model naturally wants to gather as many assets under their management as possible because their fees are directly affected by the dollar amount of assets under their control.
Client assets not under an advisor’s control are called, “held away,” assets, and do not contribute to the advisor’s AUM fee. As a result, it’s in the advisor’s best interest to have the client transfer as many of those held-away assets to the advisor’s custodian as possible. Is it in the client’s best interest? Maybe. Maybe not. Certainly it’s easier for the advisor to do their job if they control as many of their client’s assets as possible, but there may be instances where it’s objectively, “better,” cheaper, more convenient, etc., for the client if the held-away assets remain wherever they are.
Another example of client/advisor conflicts of interest might be seen when a client wishes to make a substantial purchase utilizing funds currently under an advisor’s management. Withdrawing those funds for any reason will cause the advisor’s fees to fall by whatever the percentage AUM fee is of the amount withdrawn. Might the advisor be encouraged to offer a loan against those assets instead of recommending a withdrawal, in order to maintain their fee income? Again, maybe, maybe not. Either way, aren’t we better off avoiding the potential conflicts entirely?
Are there advisors who do fantastic jobs for their clients while operating under the AUM fee model? Yes, and I know many of them. At the same time, in most instances it’s difficult for me to recommend them because I know that there are flat-fee or advice-only options available, which have the potential to save them serious money over time. Obviously, I believe I do a good job for my clients, but advisory can be about a lot of different things, including personality fit, location, etc. As a result, my fellow flat fee advisors & I have put together a list of advisors who do financial planning as well as investment management so that people can more easily find flat-fee advisors to interview. That referral list can be found HERE. Please feel free to download it & share with anyone you may know who might be interested in receiving financial advice under a fee model that makes sense.
I am limiting this discussion to conflicts of interest that may occur due to the AUM pricing model used by fee-only RIAs & advisors
