Assets Under Management - The Gollum Effect

Jul 03
Posted by Lisa

Financial writer Bob Veres has been blogging lately about the chaos that exists in the pricing of financial planning services among fee-only advisors.   He questioned why we haven’t come up with a more standardized approach. 

In case you haven’t been exposed to the basic array of pricing options, I’ll summarize:  the majority of fee-only advisors operate under an Assets Under Management (AUM) model where the client pays anywhere from 0.25% to 2% of their investable assets every (freaking) year in advisory fees. In exchange, the advisor will most definitely focus on investments and may offer to include a comprehensive plan for free or for an additional fee. There are, of course, other advice models – including flat-fee or hourly, but these last two represent a tiny percentage of the fee-only advisor market. Flat-fee and hourly advisors will also offer guidance on investments but are likely to place the same emphasis on comprehensive financial planning. You know, mundane things like goal setting, budgeting, long term care planning, whether or not you should refinance and which pension option is best for you.

FYI – all fee-only advisors have a fiduciary duty to their clients, and nearly all fee-only advisors embrace a passive approach to investing, the hallmark of which is to keep your costs down by investing in low-cost, no-load index funds or ETF’s (purchased directly). We differ in the degree to which we adhere to this philosophy - it’s hard to justify your AUM fee if you’re not developing sophisticated-looking portfolios and offering complex rebalancing strategies.

The hourly and flat-fee among us are leaving serious money on the table. If I switched to an AUM model and charged an average of 1% of the assets under my advisement, my gross income (in the extremely unlikely event that I could convince my current clients to come along with me) would increase by a factor of seven. If I were in the business of selling handbags and the same income opportunity existed, I’d be a fool if I didn't change my strategy.

But I’m not selling handbags. People pay me for fiduciary advice, which dictates that I have an undivided loyalty to my client and reveal any potential conflicts of interest. This includes the conflict between the fee that I charge and the value they will get. 

Cue the choir and usher me to the gates of Sanctimonious Valley.  But this wouldn’t sound so cringingly pious if I were your mother’s oncologist. 

We aren’t saving lives, but we have the same obligation to our clients as physicians, lawyers and accountants. If a doctor breaches this duty by recommending a drug or device in which he has a financial interest without disclosing the conflict, there will be hell to pay.

Which leads me back to Bob Veres’ question on why the disparity in fees persists among the AUM crowd. My take: squirming uncertainty about the value they are adding, internal conflict between the application of their fiduciary duty and their income goals, and the markets they are each targeting.

Advisors who target and serve extremely wealthy households get little quarrel from me. I get it I get it – you are crushing it with your team of Certified Financial Analysts and loss harvesting strategies and collars and dynamic asset allocation and rebalancing on the fifth Thursday after the mid-point of the presidential election cycle (sorry Jim Otar, I know this isn’t your actual strategy). This crowd rests easy in their knowledge that their fee is justified by the degree of financial complexity involved and the delight with which their clients pay their fee. Fair enough.

I also have no issues with AUM advisors who give their clients a choice between AUM and hourly OR at least advise them of other options available to them in the market if the complexity of the situation suggests the that the client would receive a better value for their dollar elsewhere.

Pricing gets messier when you move down the complexity and transparency scale and the internal fiduciary v. income conflict grows as newer advisors measure the gap between what they were making in their former lives and their new Fee-Only-Fiduciary career. And they tinker with their AUM percentages when guilt creeps in over how little time is spent “managing” their client’s money after the initial blizzard of implementation.

The disparity in the availability of both business models is further fueled by the overabundance of testosterone in this fee-only smoothie. It gives the industry an aura of a big you-know-what contest. Coffee is for closers and you can’t get your name on the rolls of Worth magazine without AUM.

So, what’s the right answer for a fee-only advisor who was born to manage money? Frame your services and pricing transparently, limit your clientele to those who are likely to receive adequate value and be clear about the options available to them (either with you or elsewhere).  

Hourly advisors run into conflicts all the time.  I've met with prospective clients who were already doing the things that I would recommend and tell them that I don’t think I can add any value.  Others have the money to pay me but also have a financial disaster on their hands that would be better served by a non-profit debt and credit-counseling agency so I send them to Greenpath. And a few have the trifecta of $500K or more to invest, only need investing advice and stumbled into my office. “Hello Vanguard Concierge Services?  This is Lisa Andrews.  Lisa.  A-n-d-r-e-w-s.  Anyway, I have another client for you.” The rest all get a quote from me for services that I think will add value.

I have experienced few things in my life that are as unexpectedly satisfying as telling a prospect that I think they may get a better value somewhere else.  And no, I don’t feel like a chump - because I am a fiduciary.

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