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In the past month, several readers contacted me with the same issue. They believed the fees they were paying to their advisor were too high. They used the internet to find lower cost alternatives.
Here’s what one of them told me: I have $2 million being managed by an excellent full service advisor. I’m paying the firm approximately $14,000 a year. Most of the work was done in the first year and I feel like we are on automatic pilot. It’s just not worth paying them that much every year.
Another investor said: I ran the difference between the fees I’m paying my current advisor and what I am paying a lower cost advisor who charges a flat fee in a compound interest calculator. The difference was $8200 a year. I assumed the same rate of return I was earning in my portfolio (5%). Over a ten year period, it came to $116,445. Over 15 years, it increased to $193,905. I was shocked.
Out of curiosity, I looked at the credentials of the advisors and services offered by the lower cost firms. They were indistinguishable from those of their current firms.
Should you be concerned?
Most advisors charge based on a percentage of AUM. According to TD Ameritrade, even with the boom in the markets in 2017, operating profit margins of RIA’s declined from 24.7% in 2016 to 19.7% in 2017.
Eliza DePardo, a management consultant for TD Ameritrade Institutional recommends other fee models, including a “‘cost-plus-profit” model where an RIA estimates the labor costs and average overhead incurred in serving a client and uses a target profit margin to establish fees.”
There’s never been a time where traditional RIA’s faced more competition. Although robo-advisors haven’t achieved the AUM levels some predicted, they continue to gather assets. Wealthfront has AUM of $20 billion. Betterment isn’t far behind at $18 billion. Did some of these assets come at your expense?
The assets of these robo-advisors are dwarfed by the tsunami of your competition: Vanguard. It’s low-cost Personal Advisory Service has $140 billion under management. Schwab’s Intelligent Portfolios has $41 billion.
All of these competitors will be sharpening their offerings and gunning for your clients. They have significant resources and access to cutting edge technology which likely will permit them to reduce their fees and increase their services.
Will more advisors shift to a lower fee, non-asset based model, creating even more competition?
Large fund families have made it easy for DIY investors to purchase broadly diversified portfolios at a very low cost. Would your clients be well-served in one of Vanguard’s Target Retirement or LifeStrategy Funds?
If so, can you justify your fees based solely on the other services you provide?
There will always be clients who value your services, but that demographic seems to be shrinking.
My readers may not be representative, but it seems likely others will be checking their options and running the numbers to see how much your advice is costing and it’s worth it to them.
You are experts at planning for your clients.
Now may be a good time to start planning for how your advisory practice will survive –and hopefully thrive—in the future.
Resource of the week
I recommend this article which discusses a talk by Michael Kitces. He believes financial advisors who stick to an AUM based fee are unlikely to survive the next decade.
I need your help
My new book, Ask: How to Relate to Anyone, will be published October 8, 2020. It can be pre-ordered now on Amazon, in all formats. Ask transforms lives, as those of you who have read it can attest.
Here’s the favor: Can you send out a message on your social media accounts like this?
I highly recommend Dan Solin’s new book, Ask: How to Relate to Anyone. It has the potential to transform your relationships and your life. It’s available for pre-order now on Amazon.
Just cut and paste or edit to your liking.
Together, we can make a difference. I can’t thank you enough. If I can reciprocate, please call upon me.