I’m talking about your retail wealth advisors. Not wholesale asset manager or hedge funds.
I’m talking about wealth managers, whether part of a wire house or an RIA. Not ultra high net worth, but rather focused on the average household (
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Did a summer with a local RIA and genuinely felt that the shop was earning its 100bp+ fee. What you have to recognize is that 99% of the population does not share the same level of basic investing/financial literacy that we have, and even the simple task of parking money in ETFs can be daunting for some (not to mention all the extraneous considerations that go along with that). The whole industry feels ripe for disruption but I feel that money will continue pouring to advisors bc people value the sense of security that comes along with having a real person in charge of it (and someone to blame if it goes poorly). Any decent advisor will add value with financial planning services as well, and you’d be surprised by the level of complexity & human consideration that goes into some of these clients
That's fair and I've met many of these advisors and feel they're all genuine guys who are oriented toward making an honest buck.
Where I lose them though, is when I press them on their business model (as though I was an investor looking to buy their shop) and I see how much it relies on the client paying 100 bps forever.
To me, the whole "99% of people need help" rationale is valid if the average relationship lasts a few years. After say 5 years of talking to your advisor every month (60 conversations) I'd hope there'd be at least enough confidence to spread savings around a few ETFs.
Imagine a family that pays out 20% of their net worth because they worked with an advisor for 20 years. That seems to be what the business model contemplates.
You should read about the "Turing Test". Simply stated, when a human cannot tell the difference between speaking to/ chatting with AI or another human, the Turing Test has been passed. We're not there quite yet, but that would be great if it does exist where people trust AI because they believe it is a person.
—10bps for risk profile/strategic asset allocation —10 bps for tactical asset allocation —10 bps for security selection —10 bps for trading/rebalancing —10 bps for behavioral coach — 10 bps talking to a human during anytime you wanted —10 bps for financial planning —10 bps tax management —10 bps for trust services —10 bps estate planning/wealth transfer Do you think most people find 100 bps expensive to sleep at well knowing their entire nest egg is being managed by a team of specialists working in a fiduciary capacity?
AM. Having experience allows you to present options tailored to a clients need, a need that likely wouldn't be identified with a web based account opening. The difference is I take pride in my ability to gather information and discover clients goals/needs, and provide methods to accomplish them. I've been told over the years that I have a knack for getting all the information, even when a response isn't given on the first ask. During the sutability standard days I would give the client the questionnaire to fill out, and typically they would skip questions, or say well that doesn't matter/ none of your business.
The reality is a good advisor actually does want to do the best for their clients to make the expense provide something. As a financial advisor, I don't pretend in the least to know the market better than a computer, or the competing FA's for that matter. My value has always been transparency with regards to why i ask the questions i do, how I arrived at my recommendation, ultimately the fee's generated. I know that software has improved even since I entered the industry, but my business was built on walk in clients. Most people are perfectly happy going with the path of least resistance and waiting until something has to be done to consider the next steps. I'm willing to bet 25/30% of clients wouldn't follow through get RMD annually exposing clients to tax penalities. My fee ranges on the service level, but I'm not cheap. Granted, even before I went Private Bank, and was independent I retained an estate planning attorney for clients needs, held safe deposit boxes for the final wish folders I prepared for my clients so I could ensure beneficiaries didn't experience extra burden during a loss. I think the added value is the relationship overall. I personally limited my households and didn't take clients who weren't interested in the total experience. Overall, with exception to a couple of clients children I haven't assumed a household less that 500k in likely 5/6years. As the assets increase and income goes up exclusions and a love for the minutia can add value like backdoor roth contributions, subjugated modified endowment contracts, charitable, and generation skipping trusts. I'm realizing I could go on about this all day at this point. I guess the robots could do my job, but frankly I do it better. Talking in circles, but the relationship isn't just for the client, the better I know them it helps me tailor solutions.
Not the most flattering comparison for me, but consider this, Prostitution is one of the worlds oldest professions, The fleshlight is equally capable of helping customers accomplish their goals, yet sex trade doesn't appear to be receding despite the potential savings. I think people will always be willing to pay more for the right experience.
Thank you for the thoughtful response, and I want to apologize as I look again at my topic headline and realize it reads almost like an accusatory statement.
I totally get the value of a financing planner. I would categorize the services you've outlined under estate and financial planning ("efficient estate planning/ i.e. by passing probate with a TOD/POD"......"backdoor roth contributions, subjugated modified endowment contracts, charitable, and generation skipping trusts"). I'm generally in agreement with you that the human element and bespoke advice will probably always be valuable in these "custodial" services.
However, I suppose I'm more baffled by people who use a financial advisor to provide asset allocation or "stock-picking" services. Feels like this is where FAs earn the lion's share of fees, granted though you have less egregious fee structures and incentives with the ongoing shift from suitability to best-interest standard.
I'm just not convinced retail investors should be giving up 100bps+ for asset allocation services when they really should just park investable savings in a wealthfront / betterment for 25bps, and maybe pay an FA on the side for custodial services (which I assume really is only relevant for higher net worth households).
you're going to have to let go of the fact that people often pay for things they can do themselves. it's called a service industry. you can paint your house yourself, do your own taxes, do your own landscaping, fix your own car, and so on yet people pay to do it. now, does that mean that someone paying 1% for a broker that does nothing but build a 60/40 portfolio is overpaying? yes, but sometimes people overpay when they're uninformed.
that business model is dying as people get more awareness of what is out there, however there will always be a situation where someone is paying for something that, in theory, they could be doing themselves much more effectively.
FAs are CFOs for individuals. The actual investing is a very small part of the job, its the other stuff that people pay for.
Agreed. But 1% every year is way too much to pay. I don't blame the advisor for that, because the customer has the freedom to pay 1% for a couple years, extract knowledge out of the relationship and then manage his own money.
I can't easily understand why a client should have a 20-30 year relationship at 1% a year.
Clients will pay 1% a year for 20-30 years because they are receiving something they deem valuable at that price point.
It is the same reason why someone buys a BMW vs a Toyota or vice versa, they are both cars with wheels, but are different. One person may say the BMW is better, has more options, etc. so its better while another person looks at it and says its a car, a Toyota works. That person doesn't see the same value in the BMW, regardless if the additional value exists.
Then you additionally have the person that says both cars are a waste, the bus can get me to the same places. Or they are incapable of driving so they go this route. People make choices based on cost / benefit / convenience, these choices will be different for different people.
The short answer is no. They rarely provide value that justifies their 1% fee. At a lower fee I think it can work.
To be fair to them, there are some families who would screw up so much on their own that its worth paying 1% for someone else to oversee it. I'm talking about creating savings discipline, basic tax planning, and some looking ahead on possible estate planning in case that family ends up wealthy one day.
Also, with so much alternative assets bleeding into the retail world these days (think about the proliferation of angel deals, crypto, stuff like EquityZen etc.) I could certainly think of some families that will save their wealth if they have a dude at Chase whispering into one ear to offset Bad Idea Bob whispering into their other ear.
That being said: 1% per year for 20+ years??? I can't get behind that. In fact, the juxtaposition of (i) telling clients to go with low-cost index funds because all those bps add up over the long run and (ii) simultaneously charging 100 bps a year is one of the more inconsistent things I see out there.
I'm curious. these threads come up every now and again, and the story is always the same - overpaying, underperforming, no value, other options available because of fintech/whatever.
what is your goal with your statement? do you hope for the PWM industry as a whole to go away? do you have a better idea of a compensation model? do you have a solution? if 1% is too high for psychological benefit, what are you basing that off of? what is a better number?
because I'm here to tell most of you (not necessarily you ptero) to shut the fuck up. there's countless examples of hedge funds and mutual funds that over charge and under perform. investment bankers walking away with 8 figure bonuses on mergers that do nothing for shareholder value never cause anyone on WSO to bat an eye. private equity? don't get me started. the IRRs you post are borderline criminal because it almost never reflects the actual return on committed/invested capital, which means overpay and underperform. so how in the fuck is PWM different? because it's not sexy in the eyes of WSO.
get off your high horse, this whole industry is fucked. PWM just has a better chin
WBI2994
A - PWM is as difficult to disrupt as IB. low quality PWM has already been disrupted with betterment/wealthfront, disrupting what I do is technically possible, but a much steeper curve. I don't see it for at least 20 years
B - the same thing happens with FAs, clients aren't stuck at any one firm, so this is just off base
C - fair, but main street can fuck right off. if IB guys are pissed because FAs don't catch enough shit, boo fucking hoo, not sure where you were going with this comment
@PteroGonzalez"
you are correct that a tremendous amount of work is done at the beginning of a relationship, and your idea that costs should scale down over time in accordance with the volume of work is a novel one. maybe that's what we'll do in the future, have a lower % but an upfront retainer, something like that.
however, what you're missing is the fee-only universe. so in your last example (self motivated, DIY mostly just needs help on certain issues), there are planners out there who do an hourly model like an attorney, and those people exist purely because of the clientele you describe. many of them also offer the AUM fee model, but some clients visit a FP maybe once every 5 years, pay a few thousand, and go back to Vanguard. so what you're saying essentially already exists, and they're not hard to find (just google fee only financial planner).
addressing your question if someone approached me saying they can only pay a certain amount annually because they don't need me, I'd politely tell them to fuck off. we have a thriving business and don't discount just because someone asked for it, if you don't need me, then don't hire me, it's a free country. if we aren't delivering perceived value, clients don't sign any contracts to stay with us, they can go elsewhere, so I take a little bit of issue with you and those like you saying what clients "should" do. you work for a hedge fund, why is there a 2 with the 2 & 20? shouldn't it be something like 25bps & 25? that way you pay for your back office but you only get paid for delivering the value you espouse? why don't you get paid a higher percentage in years where you really kill it?
Secyh62
you are making the same mistake as most people who create these threads - the only value add is annual performance above some benchmark. I'd argue that this is what you'd expect for a long only mutual fund, private equity, some hedge funds, etc., but if this is what you expect from a FA, don't hire a FA. I say this all of the time, my goal is not to get people who want to be DIY to change their minds, my goal is to find investors who don't have the interest, time, emotional werewithal, or patience to manage their own affairs. we can argue all day long about whether they're making a smart financial move if your only benchmark is the S&P 500, but I'm here to tell you that not everyone sees it the same way you do
and what about with your AM shop? couldn't you lower your expense ratio? why don't you? the years you don't outperform I shouldn't have to pay as much, make sense?
quick summary for everyon - these threads will continue to pop up and I'll continue to have the above responses, sorry if it's not what you want to hear. if you want to be DIY, great! if you want to hire a FA, great! what really grinds my gears is people in industries of similarly questionable value telling the investing public that they know what's best. you don't. I don't. nobody does. it's why choice, democratization of information (price wars on trading, smartasset.com so you can compare pricing, etc.), and the ability to walk are important. if I charged outrageous fees, I wouldn't be in business, so please excuse my snarkiness when you tell me how to price my practice.
I'm not an FA and I don't even use one, but it's pretty well documented that average retail investors will under perform even a broad market index, largely b/c they tend to buy high and sell low. (Hard as that is to believe, it's basic human psychology). So if you're going to get 3% returns on your own but 4% if you pay someone 100 bps to talk you out of being irrational, you've broken even. If that someone (an FA) has an elementary understanding of the j curve and actually constructs a portfolio for you that will yield 4%+ for the same risk, you're ahead.
You're in finance and might be able to put that portfolio together for yourself (and monitor it, and rebalance, and minimize taxes, and figure out life insurance, etc. etc. etc.) but that stuff is greek to most people.
I think your general assumption that people can pay their FA for a few years and then learn it all themselves is outrageously inaccurate. That's not because its immensely difficult subject matter, its just not information that mostpeople are interested in learning. Whether that's because they don't enjoy finance, find math difficult, don't have the time, are insecure/nervous about financial decisions or whatever other reason doesn't matter. I shouldn't pay my mechanic his $100+ labor rate when I can buy the parts and learn how to fix the car myself. I'm intelligent enough to learn these things, but I don't because the allocation of time/resources/brainpower isn't worth it to me. It's this exact same reasoning that leads people to hire financial advisors or any other specialized service provider.
To illustrate my point, i'm the "finance guy" in my group of friends, I'm constantly explaining simple concepts to them (roth vs traditional, capital gains, etf vs mutual funds, etc). These aren't dumb people, they are college educated at above average schools with good jobs and backgrounds mostly, yet they don't know this basic stuff. They will learn some of it over time, but most of them are not interested enough to continually educate themselves on these topics (which are ever-changing as your life progresses - age, income, wealth, family stage, etc, all being influencing factors). My guess is many of them will go on to hire FAs in the future as their situations become more complex, because they won't continue the education process and would like the comfort knowing that their hard-earned money is being handled properly. The 60-100bps fee isn't going to be the issue for them, it is going to be finding a quality financial advisor that they can trust to guide them through their financial lives.
^The last paragraph says it all! The advisory or asset mgmt fee is for the advisor's IP, overall knowledge, guiding hand, etc. Money mgmt per se is totally commoditized and is currently experiencing a race to the bottom. To that point, there is a growing army of advisors (again not asset mgrs - who are really just asst gatherers , outsourcing the real money mgmt) who get paid handsome fees for providing advice and planning (financial planning fees - 10k, 20k, whateverK PER YR) and essentially give the money mgmt fees away - just using Vanguard ETFs without any other fee involved.
Regardless of how one is compensated, the role is an important one. As a retail based planner for the past 30 yrs, I would say my skillset and job is about Transforming Fear and Confusion into Confidence and Clarity. Simple as that. Products are irrelevant. They are just the tools used to implement the plan that accomplishes the transformation. If I get paid 1%-1.5% of AUM, an up front commission on an insurance product, a financial planning fee, etc. who cares? The client doesn't because they need the support. Very little to do with stock picking or anything like that.
Have ongoing client relationships for 25+ yrs. It's not about them not needing help any more (25 yrs x 4 conversations = 100 discussions - they should know this stuff by now). They always need help because they are routinely dealing with new situations, wanting info on other strategies (tax law changes, personal / family issues). The biggest factor is, as they age, their goal and plans change. Having a professional guide them and provide CLARITY is instrumental to them making necessary changes to meet their current set of goals.
That's what a FA gets paid for, not managing money. Aren't too many of them that actually manage money truth be told.
^ "Brain of a capitalist and the heart of a therapist" Love that! Gonna use it. I've described what I do as the crossroads of finance and the human experience. The finance part is by far the easiest. It's just basic math. Any idiot can do that. The human experience or "heart of a therapist" is the really challenging and fun part. It requires being able to simplify complexities in a way that's totally comfortable to your client.
Literally just had a long term client and personal friend call to discuss moving in to real estate (not a RE Fund or REIT, but actual hard asset real estate). I happen to own some so was able to explain the issues regarding property maintenance, vacancies and lack of liquidity (which always seems to matter most when you desire liquidity - either you need it for cash flow or you want to invest in something else). Conversation had nothing to do with rates of return, outperforming the traded markets, etc. This guy just htought it would be cool to diversify in to RE. I knwo for a fact he wouldn't think it was too cool when he wanted his money out and had to wait on a sale. These are just one of the many types of conversations a FA has with their client.
Different angle on this conversation...So in addition to being an FA, I manage several. I have one guy who is literally brilliant. Annoying but brilliant. I frequently tell him he should not be in retail, but rather instituional money management. He's a CFA (unusal for a retail advisor), has several graduate degrees, etc. Nice business, spits out 600k gross per yr. He's a money mgr, not an advisor (or that's how his cleints see him- actually knows a ton of stuff but has a hard time communicating with his clients in that way). He loses clients every yr because of returns. He is an extremely active mgr. His portfolios are more like mutual funds with no holding taking up more space than 1 or 2%. He tends to build defensive portfolios and can point to many scenarios where he saved his clients tons of money (market down 10 he's down 2, etc.), but he never outperforms on the up side.
So he loses clients because the relationship is based on fees and returns. He generally charges less than others, does a ton more work than most, but loses because they don't see the value. He could provide all the advisory related value but they see him through the lens of a money mgr where the only metric that matters is net return. Still does well but does not have great relationships with clients as that type of scenario doesn't allow for one.
A real Advisor will develop a long term relationship with the client / clients family (not just to be a the good sales guy/gal) to really understand there issues. Those interactions and related guidance is what being an advisor is all about. I NEVER have to justify my fees or returns. My clients don't care about that stuff because they know they're getting great guidance and advice. I'm like their personal CFO. They ask me questions they would NEVER ask a portfolio mgr. Range of clients are all over the spectrum in terms of education, sophistication, and wealth. Lots of small buisness owners, retirees, doctors, business execs, school teachers, etc.
The reality is they are paying for planning and guidance and just happen to get money mgmt included. If I stripped it out, they would have to pay me a significant annual consulting fee (minimum 10k in most cases), so they would rather just keep the arrangement we have. I'm actually saving them money as 1% of 1M =10k. Smaller acocunts a lot less (but I charge more). But in either case they get the planning. The other way they'd have to pay me AND pay for money mgmt. My model saves them a ton.
Keep in mind that unless they want to educate themselves and spend the time both managing their money and understanding / handling all the planning, it has to be worth someone else's time. I wouldn't work for them for less then the 1% (most case more).
Lots of talk here about whether 1% is worth it and some posters have actually made a reasonable case for why the qualititaive relationship based stuff can make it worth it for some.
Only one problem though - most FAs I have had the displeasure of meeting seem to be spneding all their time trying to get new leads / clients than actually 'working their ass off' (can't believe someone actually quoted this) on their clients investment portfolios. Like 95% looking for new business / 5% working on what their clients want them to do.
I have been shocked at the lack of even a basic understanding of investment theory from some of these people - most may not even be able to articulate the difference between IRR and annualized return. And before hardos here chew my head off, yes, my interaction has mostly been with younger FAs who are just trying to build out their business rather than the older ones managing near HNW money. Although the latter seems to spend more time on the golf course than looking at their client's portfolios.
It's a business model that disgusts me - strong Herbalife vibes .....
if you're going to call out something I said, have the cojones to tag me and use the quote accurately. you don't know my work output, you don't know my day to day, so yeah, I take a little issue with your comment. plus I didn't say I work my ass off on clients investment portfolios, my quote was "someone who's going to work their ass off trying to get them the best financial future possible, whatever that means," so don't put words in my mouth
and don't lump me in with those knuckleheads who don't know basic financial concepts and young FAs who don't know shit or the old dickholes who don't put in the work. I may be the exception to to the rule, but if you're going to misquote me and then call my industry a pyramid scheme like herbalife, I'm going to bite back. sorry you had a bad experience, but that doesn't mean all FAs are bad
PS - if you were talking about someone else, my bad. I tried searching the terms "ass off" and only found my comment and yours.
If retail FAs do not provide ANY VALUE then I guess we shouldn't reasonably expect to be compensated for our services. I guess millions of clients are stupid to pay for our advice?
Okay, let's get real now. The PWM business model is not going anywhere. As long as people have complex financial goals and needs someone will need to work with them to figure it out. The question is the VALUE of those services and that is very much driven by the needs of that specific client. At each point across the spectrum of clients is a group of advisors that have a customized set of services to fit their needs. A good advisor matched with the right type of client will provide value that easily matches the 1% AUM charge that everybody is quoting above.
I've been in this business for about 15 years and my average client size is about $2MM. My clients are corporate executives with complex planning/investment needs and the discussion on fees very rarely comes up.
Great post! Completely agree,
It's very easy and probably natural for a non advisor or more technically oriented person to ask, "Why would someone pay you a fee to do x, y , and z when they could easily do it themselves? You guys don't beat the indexes anyway. They'd be better just investing in Vanguard index funds at 5 bps."
The fact of the matter is it's not about picking winners and losers and managing money. It's about managing their overall financial world. That's what they pay for. Been at it for 30+ yrs. Hasn't changed in that time. If they're looking for advice on a whole array of issues (tax planning, wealth preservation, income planning, etc.), we provide a lot of value. Most of my clients are happy to pay north of 1% and the money mgmt aspect is allocating them in very diversified portfolio of low cost ETFs with the occasional individual security. They could buy all this themselves but they would miss the advice / planning. You'd be amazed at how many $1M+ accounts we see that were just invested in XYZ because "that's where we've always been". People reaching retirement and still being almost 100% in equities. Never thought about income laddering, preservation, etc.
Now if you're dealing with a technically oriented, "do it yourselfer", we're probably not a good match. I've turned them away as they are far too transactional and are really just looking for someone to execute their trades. As much as they need our help (because they don't know what they don't know), they won't accept it in the form of an advisory based relationship. They have commoditized it so I graciously walk away before it becomes a problem client. Some of them look shocked that I won't work with them but I'm not interested in that race tot he bottom mentality.
Plenty of folks (millions actually) who are professional , good income earners who value the advisory model and want help (just like they do with a CPA, attorney, etc.)
If you don't get that, you never will. That's OK. Next!
It's just a number. Why not 2% or 5% or .5%? Why is it ok for the hedge funds to get 2 / 20 on institutional money? Even if it gets lowered to 1 /10 they get it on billions.
It's all about the value created for the client and how much they are willing to pay. If it was strictly building portfolios, there may be less value provided because a monkey do that (if the monkey is willing to spend the time reading up on things, following markets, blah blah blah).
Just picked up a million dollar account. Client is a 72 yr old business owner. Outside of his business, all of his invested assets were in an advisory account. 80% equity, 20% cash _yes cash that was spitting off an advisory fee. Actually more concerned about the 80% equity.
After several thorough conversation regarding goals, risk tolerance, taxes, wealth transfer (business is worth ans will be sold within 2 yrs), we moved him into a more appropriate blend but the allocation was the least of his concerns. Wanted to set up a funding mechanism for his grandkids, leverage taxes, remove financial risk of senior healthcare issues, and several other pressing issues. I charge him 1.3 and will handle any insurance plans that are implemented to execute his wealth transfer goals. He could care less. Wanted to know if he had to pay me a planning fee up front.
That's the real world. You either provide value or you don't. He wouldn't know where to begin to do all this stuff on his own. 1.3 is nothing relative to the benefits he receives.
I'm not a RIA/FA but I interned not that long ago at an advisors office in the UK.
I think quite a few people miss the point of having an FA. The whole idea of "the client can just do it themselves eventually, so you don't deserve your 1% fee" is honestly quite a ridiculous statement. It has been mentioned before in this thread that the vast majority of people on WSO are highly educated in financial matters already and given some of the arguments made against FA's its clearly apparent that this is the case.
As a counterpoint to the naysayers, take lawyers and their business. At some point in your life, you will most likely need to speak with a lawyer and pay them a fee for their services. Now, many of you will not have an in depth understanding of how the law works, take for example wills. Now I could try my hardest to learn how wills should be made and the myriad of steps that need to be taken to make sure a will is valid. Even after I have done this there is a serious possibility that a mistake has been made due to lack of knowledge on the subject and that could render my will invalid. I could however, just go to a lawyer, get their professional advice, pay them their fee and be safe in the knowledge my will is right and my estate will be divided exactly how I wanted.
Now I genuinely don't see the difference between this example and a financial advisor. There are so many people out there who don't know anything about financial matters. They don't know the difference between a equity and a bond. They could take it upon themselves and try to learn how to construct their own portfolios but like the example before, they risk making a mistake and potentially jeopardize their financial goals/retirement. It might also be the case that they don't have the time, motivation and more importantly, the interest in learning about even the simplest financial matters. That's exactly the point where FA's come into their own and really provide a client value.
I mean truly power to you if you know enough about finance and are confident enough to plan your own retirement, you will certainly save yourself money. However, its key to remember, you had to most likely spend quite a bit of time learning the concepts and the jargon in order to get to that point, which is fine because I can imagine like myself you enjoy learning the concepts and the jargon. However, not everyone is like you, not everyone gets excited and motivated about retirement planning.
This is just my opinion. The matter of how much advisors charge is another debate entirely but I am not knowledgeable enough to elaborate my thoughts on that subject.