Do retail financial advisors provide ANY value??

WBI2994's picture
Rank: Gorilla | 627

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 (<$1m in assets).

Why hasn't this entire retail advisory industry been displaced by roboadvisors? Surely they don't generate any alpha over dumping savings in ETFs?

Curious as to why the trillion dollar retail advisory industry still exists. Thoughts?

Comments (76)

Dec 8, 2019

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

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Dec 9, 2019

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.

Dec 10, 2019

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.

"The three most harmful addictions are heroin, carbohydrates, and a monthly salary." - Nassim Taleb

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Dec 13, 2019

Yeah I see what you're saying. Most clients only got one meeting per year, and >half of these were spent catching up & talking about family. Despite the obvious inefficiencies, it's clear that even financial professionals value the input of outside advisors. One of our shop's biggest clients was pretty high up in the PWM division at a regional bank, and I was always puzzled by the fact that he kept most of his family's wealth with us. Hell, even Jim Simons has a financial advisor. My intuition says that the FA industry will die a slow death, but I also wouldn't be surprised if the industry continues to kill it even after the boomers die out

Dec 8, 2019

<1mm it's iffy. prior to gearing to 5mm+ I cut my teeth at Jones. Prior to the initial DOL ruling the vast majority weren't worth the fee. Thats not to say there isn't a value added in the segment though. Beyond the issue of investors fear of the market, their is a abundant technology gap, and while some aging clients could adapt, their comfort level would likely prevent them from engaging in the market all together. The value proposition for that segment would be, digital middle man, ensuring accounts are established for efficient estate planning/ i.e. by passing probate with a TOD/POD for the accounts. The next aspect I believe has value is having prospective, even beyond the markets, as I don't consider myself a great 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.

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Dec 8, 2019

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).

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Dec 9, 2019
WBI2994:

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.

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  • Associate 1 in S&T - FI
Dec 8, 2019

FAs are CFOs for individuals. The actual investing is a very small part of the job, its the other stuff that people pay for.

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Dec 9, 2019

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.

Dec 10, 2019

The client could extract knowledge from the relationship, but unless they practice in the profession daily like the FA, there is no chance they have the holistic knowledge an FA provides. FAs can provide safety and reassurance. 1% is not that much for great service and not having to worry about your wealth. Plus, if you can post good returns and have smart tax strategies, the 1% fee could potentially be paid out from income generated.

Dec 12, 2019

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.

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Dec 9, 2019

Even if the only value add is holding your hand through the investment process, it is worth it. If it wasn't for financial advisors, a lot of people would be just stuffing cash under their mattress or parking it in a CD at the bank.

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Dec 9, 2019

Some great posts in here. I am not a financial advisor but have personally seen a few interactions with some.

To briefly add - most clients just want to sleep well, focus on other things and for their TRUSTED advisor not to blow up/lose them their money. That's it. If you happen to be a nice person and funny/easy to get along with, your clients will look forward to meeting with you once a quarter/year for an update on your portfolio and won't ask many questions. They will be sticky and happy to pay your fees.

Clients are happy. Advisors are happy. Everyone wins.

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Dec 9, 2019

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.

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Dec 10, 2019

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

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Dec 10, 2019

Dude, you make valid points. I'm sure to an extent, IB/PE professionals shit on FAs because of a perceived intellectual inferiority while ignoring the inconvenient truth that all sectors of finance are part of the same hypocrisy (i.e., exorbitant fees for retarded acquisitions and misleading IRR figures).

But I think PWM is a go-to punching bag for IB/HF/PE guys in the philosophical "do they provide value" debate because:

A) PWM is more vulnerable to technological disruption. Harder (if not impossible) to design an algorithm that can replicate the execution work a banker does throughout an m&a process.

B) when HF and PE fail to deliver value, their investors (institutional LPs) can vote with their feet. How many hedge funds blow up, and how many PEs fail to get past Fund I or I-A? I don't necessarily see FAs facing as much pressure.

C) Main Street already hates Wall Street, and doesn't usually include FAs within that category (and rightfully so, they really aren't)

So yes, broadly speaking there's a lot of information asymmetry inherent in finance that allows us all (PWM and I banker alike) to get away with higher than "normal" fees. However, feels to me like the retail area is democratizing much faster

Dec 10, 2019

I think the industry serves a useful purpose for many, and I said in another comment that the guys I know who are financial advisors are all great guys . . hard working, motivated by helping others, etc.

So if my lens is "look at this industry and what do they do" its a very positive view.

If I change my lens to "what would I recommend for a person close to me" . . I'd sit down with that person and look at the math, and I'd be very worried about how they're going to be ahead 20 years later with the hurdle of those 1% fees every single year.

Just tossing a random thought out there: maybe the fee should go down over time? I feel like that would better match the value add. A typical new client doesn't know anything and its probably worth 1% those first few years to get them on the right track. That changes their life.

But then after some time, once the client knows some of the basic-but-critical stuff like savings discipline and avoiding huge tax mistakes . . I'd expect that client to eventually not want to pay 1% anymore and push for a lower fee.

Needless to say it would vary by client.

Here's my question: is this maybe already happening? Say you have someone who's pretty financially sophisticated who's been managing his own money for a while and doing a good job of it. Eventually after a few kids he decides he'd like a little help with some of the more advanced stuff, but he's still 10x more knowledgable than avg client. What should he do . . would he get any traction saying "look, I can only pay 30 bps because I can live without you guys"?

Dec 10, 2019
thebrofessor:

what is a better number?

Why not some kind of flat advisory fee plus some annual/longer-term incentive based on excess returns over a benchmark? I am looking at this from the perspective of a client, or if I personally was a client what I would want to see. I don't want to give you a % of my assets because the cost to service my account will not scale at the same rate that I expect my assets to grow, but I also want you to be incentivized to achieve the best investment results over the long-term.

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Dec 10, 2019

@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.

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Dec 9, 2019

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.

Dec 9, 2019

True. But I would say your first point is the one that matters. The psychology thing is huge. The second part (all the rebalancing and tax efficiency stuff) is minor, but its also where advisors get to use a bunch of jargon to convince people they're needed. Very easy to make a client's head spin with some tax talk, when in reality the rules are pretty basic. And what mutual fund managers won't tell people is that rebalancing is almost 100% bullshit,

So if nearly all the value is from psychological discipline, which I believe it is, I feel like 1% a year is way too damn much to pay. There's got to be a better way. I don't know if its just a lower fee or a bestseller or a blog or a Cramer-esque investing show or what . . but word of mouth should work well enough that the average person isn't paying 20% of his savings for 20 years of psychological discipline.

Dec 10, 2019

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.

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Dec 9, 2019

As a Financial Planner - The % of assets model is there to bill for the relationship. And the relationship is meant to be long term. there will be some years where the client may not get their "value" because there may not be that much work to do that year apart from some rebalancing. The next year, husband/wife/partner may die, and they need a lot of work done to there situation. There is no chance in hell, someone can make a rational investment decision (let alone think about what the best thing to do with their finances is) during an emotional stage in their life. They therefore delegate that to an FA to help them handle it. I've seen so many FA's work that is absolute garbage some of those people should be thrown in jail. At the end of the day, any good advisor doing comprehensive planning work, is usually worth their keep. In fact, I argue they should charge more than 1.00%

No to change the subject or anything, but look at any SPIVA report card comparing active vs. passive.. 80+% of active funds under-perform their benchmark. The numbers and the math is against active management. (I'm just providing a different perspective) Why do people still try to "beat" the market? A good FA should realize their limitations. Managing costs, (investment costs as well) is part of a financial planning process.

Further this, any small number compounded over a long period of time is going to be a large number. Take into consideration how much coffee you drink? Over 20 years it would probably be close to 40-50K...does that mean you are over paying for coffee?

fwiw I am of the belief that investment management (retail) is commoditized and is a very small value add on the advisors end. The value is in the advisors Intellectual property, just like any good lawyer, accountant, therapist, etc.

Dec 10, 2019

^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.

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Dec 10, 2019

Yep...Bingo! Nailed it Rickle

Dec 10, 2019

1% may or may not be high depending on how you look at it, but I would argue most people don't really understand how much that is or how to calculate it.

I think it was a freaknomics thing (or maybe one of my college professors), that, most people will spend time clipping coupons, or working a 2nd job, when actually they could pay a smaller investment fee.

As stated above, most people just want someone else to handle their money. It's like Buffet said, he really just reads 500 pages a day. Anyone can do that, but how many do?

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Dec 10, 2019

Sure, good advice may cost a lot over the long run, but bad advice is even more expensive. Look, Any decent adviser could probably add 2-3% off the bat of after tax rate of return simply by advising on the Asset Location and the tax aspect of the income of those investments, (sheltering interest income, dividends, or deferring cap gains) Basically where to hold certain investments. There are countless areas where good advice can save people TONS of money over the long run in paying less taxes, maximizing registered or non-reg accounts (qualified vs. non-qualified in the US) etc. Not to mention preventing people from blowing themselves up, and establishing confidence in what they are doing.

That's quantifiable value right there compared to the average DIY'er....I'd love to see Shwab/Interactive Brokers/ or TD Ameritrade release the info of the average investment return of the DIY'er....My guess is that its abysmal because if it was high they would be touting that more than "free trading", etc.

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Dec 10, 2019

I knew some 21 year old I used my RE license to get an apartment in NYC. Dude was pulling 200k++ from his online business but was getting suckered into invsetments like life insuirance. The 1BPS for that dude is totally worth it to keep his money in legitimate investments.

Array

Dec 10, 2019

Depends on the shop -- However, I would argue there are most likely more than a couple handful (lol) of individuals who have worked with a WMA over the years and have said their fee off 60-100bps is more than worth it. It comes down to the individual. Are there people who can park cash in a ETF, retire fine and not worry about anything? 100%. Are there people who are a mess financially and can't figure out how to open a savings account at chase and think a Roth is a type of candy bar? 100%.

The 60-100bps is earned in the behavioral "alpha" produced by the advisor. I heard once to be financial advisor you need to have the brain of a capitalist and the heart of a therapist. Typical households want the peace of mind that they will be "okay" when the proverbial "sky" is falling, not the alpha your awesome ETF and index fund portfolio provided.

Dec 10, 2019

^ "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.

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Dec 12, 2019

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).

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Dec 16, 2019

Let me preface my response with: I'm a Retail FA with about a decade of industry experience making IBD compensation who built a practice from scratch-- and this is one of the most self-serving threads I have read from my fellow contemporaries I've seen (trust me, I hear it a lot around the office). I say this because there are a lot of younger FAs or junior FAs who have been sold a certain pipe dream, but really, they are getting used up by their senior FAs with certain promises that will never come to fruition "oh we can definitely do revenue sharing or partner up one day." Guess what? Seasoned vets tell me it's all BS, because they sell their junior FAs large books of businesses, but little do they know that the junior FA will be buying a book of old clients who are virtually on their death beds. It's a sad business. You have been warned.

1) What is the lifetime value of a client? 1% at 5-10 years? How much longer until they learn that the 1% is too high? Let's assume healthy market growth: that 1% off 1MM = 10,000. but 1% off 2MM = 20,000. Will they still be happy with the same services at 20,000? 1% isn't truly 1%.

2) Don't give me that BS about estate planning or tax planning crap. Many multi million dollar FAs aren't aware of tax laws or innovative tax planning strategies. They do things like sell life insurance, open insurance trusts, sell family partnerships, etc. Even if they were informed of sophisticated estate planning or tax planning strategies, they can not legally practice it, because there is a conflict of interest. They typically refer it to an attorney they have on retainer. Really, 1% is worth a referral service? Does Yelp charge you 1% when they refer you to a good restaurant?

3) A lot of quality retail FAs are starting to have their CFAs. Heck, I've seen Edward Jones brokers who knock on doors with CFAs. While this isn't the industry "norm", I would hardly call it unusual or rare. Do a quick Linkedin search of how many FAs have CFAs and/or from M7 MBA programs. You will be surprised.

4) This is the case of corporate strategy 101. Every industry gets disrupted, unless they build a protected ecosystem or continue to innovate. What has retail financial services innovated in the last ten years? Nothing. We sell a commoditized product. The only differentiation is the personal service that comes with it (which I will address later).

5) The best argument I made to myself for staying in this industry for the past decade was that clients will always need emotional hand-holding, but do they? In comes the age of machine learning and data science. Ali Baba has raised the world's largest money market fund without a need for using a human. Turns out that data science can help influence consumer behavior and have ways to distract them and alleviate concerns. Don't think it can influence behavior? Please tell me you've never been addicted to an app or a smartphone, or Facebook/Instagram/Reddit/Forums/whatever.

6) Even if the industry doesn't change, and there's a demand for our services, guess what? My consulting friends are already all over the wirehouses/regionals/bank broker dealers helping our executives who are planning to automate our jobs anyways. Sure, they will keep many of us good ones around, but they still plan on driving compensation down FAST. "Oh I'll just go to another firm or go independent" says many of my coworkers. Sure, just like how an RIA at TD Ameritrade is really now an RIA at Charles Schwab? Schwab announced they were buying out TD Ameritrade few weeks ago. What pricing power do we, as the retail advisor, really have when all the firms begins to merge or begins fking over their FAs? After all, we have to be registered with a firm, somewhere, right? They can all change their payouts and fees on us.

7) PWM is more vulnerable over IB/PE because we do a less complex task than the IB/PE guys. Hedge funds and asset management shops are already disrupted and arguably more screwed than us (the mediocre ones anyways). Pension funds, endowments, institutions are terminating those managers faster than our industry is dying. IB/PE, however, has a higher barrier to entry than PWM. Any idiot can pass a Series 7 exam, but not everyone can get into a target school and get into/survive at a IB/PE shop. Fewer applicants/hires = some level of protection. Also, the IB/PE guys are the ones building models and taking over the PWM shops. Look at how many PE shops have bought out independent broker/dealers over the years, even the large ones such as Cetera/LPL. Look at how many multi-billion dollar RIAs they have bought out.

More than happy to have an informed non-emotional driven educated discussion.

Dec 20, 2019
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Dec 21, 2019