If you think about it, successful financial advisors are a lot like politicians. Both are skilled persuaders who stand to gain by winning your trust. But when it comes to politicians and financial advisors alike, you’re well served to look beyond polished sales pitches for signs of real substance.
At AdvicePeriod, we know all too well that countless consumers are overpaying for financial advice and receiving too little in return. Specifically, many advisors are charging luxury prices for an investing service that has become a commodity – this service is known as asset allocation, and it’s widely available for a fraction of what most advisors charge for it.
Asset allocation is the process of balancing the expected risk and reward of different investments to construct a portfolio providing you the best chance of achieving your goals within the timeframe you choose. It’s the meat and potatoes of investing, based on long-accepted investment theory. And long ago, asset allocation required a lot of work by advisors. But technology has changed that.
These days, software has automated much of the asset allocation process, as well as ongoing portfolio management: It’s now quick, cheap and easily replicable. In other words, it’s become a commodity. Commodities are widely available from many providers at the same level of quality. If a Swiss watch is a luxury, a Timex is a commodity. Commodities, by their nature, are cheap.
And this is where consumers are getting ripped off: While low-cost, efficient portfolios are widely available from multiple sources at a fraction of a typical advisor’s management fee, many advisors continue to charge more than 1% for this commodity. Charging a fraction of a percentage point more or less may not seem like a big deal. But compounded over time, advisory fees weigh heavily on your investment results.
How do advisors get away with over charging for what has become a commodity service? In many cases, it’s pure salesmanship. They present their investment services not as commodities, but as unique or “exclusive.” The truth is that to justify premium fees, advisors should be providing value beyond asset allocation.
A quick note here: True “advisors” are not to be confused with “brokers.” A broker is compensated through sales commissions each time he or she sells you investments or insurance. Brokers are inherently conflicted because their compensation model pits their own financial interests against yours. Advisors, on the other hand, have a fiduciary duty to provide advice and investment recommendations that are in your best interests. And because they only charge a fixed fee, they avoid many of the conflicts of interests that brokers face in their transactional-based approach.
Now for the good news: A small but growing minority of advisors are uprooting the practice of overcharging consumers. They are either charging less than the industry’s standard high fees, or they are adding services that provide a large, demonstrative value beyond basic portfolio construction—services such as asset location, financial planning, and even intergenerational estate planning that can potentially save clients millions of dollars. Advice Period is proud to be part of that vanguard.
You can be sure that the old-school, overpriced advisors aren’t going to lower their fees just because they can. As always, it’s up to consumers to drive the change. How? By reserving their patronage for the providers who are truly earning their fee. Does that description fit your current advisor? If you’re unsure, we suggest that you ask him or her the following simple, no-nonsense questions:
1. Are you a broker? That is, do you receive a sales commission when I buy an investment? (Remember that a broker can be “dual-registered” or “hybrid,” meaning that he can charge fees one moment, and commissions the next. These are not much different than full-fledged brokers, and arguably worse.)
2. What percentage of my assets under management do you charge for your services?
3. If your fee is more than about 0.50%, what additional services are you providing me to justify that additional pay? And how do I know those fees are fair?
Extra fees can add up and drain a significant portion of your wealth over time—and that’s why it’s important to ask tough questions now. Do not be persuaded by polished sales pitches—elect an advisor that focuses on adding demonstrable value beyond portfolio construction. We’re AdvicePeriod and we approved this message.