I was a fee hater.
Like a younger, more handsome John Bogle, I would rail on fees. I’d stand on every rooftop screaming about avoiding fees at all cost.
For this reason, when I was a financial advisor, I provided what I thought was top-notch service and undercharged for it every day.
How much did I charge? My minimum fee was $500 per year.
Undercharged? There is no such thing, Joe! Less fees = better. Duh! You should have charged $300!
Think so, do you? Sit close, young padewan, while Uncle Joe tells you a story:
My Experience With Fees
Early in my career I lucked into the opportunity to give speeches on behalf of one of the top advisors in the country. I’d fly wherever he wished and spoke to rooms full of people about good planning. In exchange, he allowed me to move my offices into his suite.
Awesome! What a break for a new advisor; I’d get to see the inner workings of a well-honed operation and maybe glean some tips.
At first I was disappointed. All I saw was what looked like a cookie-cutter assembly line of advice and deliverables. Many clients received offshoots of similar advice. The firm never stuck their neck out. They avoided complex situations at all cost.
That lead me to believe that he was among the best in the country only because he could “sell” people on ways he’d jack up their fees.
…and jack he did. I rarely saw him charge less than $2,500 for planning, then garner asset management fees on top of that. He was a fee-based selling machine.
One day the operations manager and I were talking. I asked a polite question about how redundant their process management workflow seemed. To give you an idea of what I thought about this guy: I’m sure the term “cocky smartass” wouldn’t be far off the mark.
He said, “Have you noticed that we charge five times what you charge?”
I smiled. “Yes.” What a loser. I could never charge what they did! They were just leeches, skimming off of their client’s blood.
He said, “We charge five times more because we’re five times better than you.”
I took it personally.
I shouldn’t have.
Three months later, we were in agreement:
he was five times better than me.
Why He Was Better
This planner was so good, I’d worked right under his nose and hadn’t noticed his skill. The systems were sublime. Where I’d seen cookie-cutter assembly lines before, now I saw a brilliant asset allocation arrangement. Where I’d believed he was charging excess dollars to put boring plans in place, he was dotting every “I” and crossing every “T” for clients…mostly doing the boring stuff that usually was swept under the rug.
In short, he had a proven system of asset management and plan building. If you wanted that service, he covered his costs with his fees. If you didn’t want it, you should probably look elsewhere.
He didn’t try to be everything to everyone.
What You Can Learn
You don’t have to pay $2,500 or more to some advisor if you’re willing to perform the critical tasks that this advisor captained for his clients:
1) Design a plan that covers the six areas of financial planning and rigorously maintain the plan according to a set schedule. Make sure everyone involved is up-to-speed with the details.
2) Build a system to check and maintain your assets against your plan. He had systems in place to notify him when assets deviated too much from the plan. Build your own set of alarms.
3) Carefully guard against taxes and excess fees. This seems like an oxymoron, because this advisor charged a ton of money, but his fees were largely performance based. To increase his fees (and his client’s net worth) he had to ensure the plan was a lean-mean-return-gathering-machine. The only way to do that was to develop a comprehensive tax strategy (example: tax efficient investments outside of IRAs while tax-eaters inside shelters) and low-cost investments.
4) Scour insurances for opportunities. This advisor would review all of his client’s insurances regularly (every two years) to find wasted money. He’d also use insurances wisely to plug holes. One place he nearly always recommended: disability coverage.
5) Build legacies. He was the adamant that everyone either had a family or charitable organization they’d want to have flourish if they couldn’t use their own money. He’d make sure that the estate plan was air-tight and (as with insurance) review these plans every two years.
6) Set communication systems. Clients received a newsletter every six weeks. There was a conference call scheduled for two quarters of the year, along with two face to face meetings. Generally, the face to face meetings were comprehensive and the phone calls were “just checking up.” While he “allowed” only one member of a marriage to take part in phone calls, he was adamant that both spouses attend meetings. He’d become especially irate if one didn’t understand finances and didn’t want to participate. His thinking: if the knowledgeable spouse passed away, the other was screwed.
He also wasn’t afraid to call every client when markets imploded. During the 2002 and 2008 crisis, his whole team was on the phone non-stop, sharing information and passing along strategies. Usually, he wasn’t changing course, because his asset allocation model was already designed to weather downturns. However, clients loved hearing from him.
Was some of this overkill? Maybe. Often insurance and estate planning needs didn’t change. However, when something did, the advisor was on top of it fairly quickly.
It’s a Choice
During my 16 years as an advisor, there were many clients who refused to pay fees even though they would have been far better off had they paid this advisor. It’s fine to accomplish your financial goals without an advisor (in fact, if you’re willing to complete the six steps above, I’d recommend it). But if you decide not to, make sure you’ve designed systems for success and aren’t just being cheap.
Financial planning is just one example. Are there areas of your life where you’d be better off paying a fee and you just can’t do it? Are you cheap?
(Photo credit: Hands Clenching Dollars, Muffett, Flickr; Couple and Advisor, Jerry Bunkers, Flickr)
I’d say I’m cheap but I think it’s more that I don’t give certain things a high enough priority and therefore allocate time for them. I’ve been slacking on getting a DPOA for Financial and Health care. I need to get it done and it’s not the cost…I just tell myself that I’m too busy.
I think you can still get the forms at Office Depot, so it’s pretty close to zero cost. Get it done! 😉
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wow. Very interesting topic here. I love it. Thanks for sharing this wonderful tips.
I thought this was a great article about paradigm shifts! I think there are a lot of misconceptions about financial advisers, and many times people just hear the bad stories, so they are skeptical of using one. However, after reading this, I have a new perspective on what they do and the advantages of having one. Good job, you taught me something new 🙂
Honestly, I can’t really foresee paying for a financial advisor in my current state.. When climbing out of debt, the it really comes down to spend less, earn more, and put everything you can against your debt.
However, once we are out– I could see the needs changing. When it comes to investing in our retirement, and properly funding our kids’ college funds, I think that a professional who lives and breathes finances would certainly be of value. And when it comes to investors, like most things in life, I am sure that you get what you pay for.
Hopefully, Jefferson, you caught that my preferred way of financial planning is NOT to hire an advisor. If you have the time to learn all the steps I mentioned, doing it yourself is still optimal.
But I agree: you definitely get what you pay for with a top advisor.
One other point, Jefferson, the steps at the bottom of the article….they definitely apply to you, based on the little I’ve read about you and Michelle on your blog. Good steps to follow.
If the data supports, then that’s usually the end of the argument. The problem arises when people are doing a ton of strategies that don’t ultimately benefit the people taking on the most risks: clients
Great comment, Roshawn. I’ll be doing a post on that soon: when you and your advisor don’t see eye to eye.
I think the view of advisers is skewed partially because people don’t see most losses with taxes, under-performance, etc.
There are plenty of people who might pass up a $500 CPA visit because it looks expensive, never knowing that their tax strategy is bleeding them of thousands every year. And it’s easy to say that index funds are always better performers, but what is true in the very, very long-run definitely isn’t always true in terms of a person’s lifespan.
Investing and insurance is so dangerously close to personal finance yet so far away. What works all the way up to that point is cut, cut, and cut some more. It seems entirely logical that the next problem would be solved with the same answer (cut!) but I don’t think it’s really that simple.
It’s funny you mention that, JT. I learned that specifically from this advisor for the reasons you state. He’d (and later, I would) categorize all the money he’d saved them in taxes, insurance overlap costs, budget cuts, etc. Many times he needed that information along with market appreciation to justify the next year’s fee.
Average J, DIY financial planning is very possible, and mandatory, even if you pay an adviser. Why? You have to know enough to screen shysters from informed advisers. Kind of like auto mechanics, there are good ones and ones who charge you to pretend they are good. You can learn a lot by picking up a book or two. A tax free property transfer may be like rebuilding a carburetor — not a DIY project. A good tax or financial adviser should always pay their own way — but you as a client needs to be informed enough to know when that is.
Awesome point, Astro. I used to tell clients they didn’t hire me so much to do it for them as to help them know what the heck they were doing. It’s easy to get scammed if you’re just taking someone’s word for it.
Depending on what someone was able to do for (and proveto) me and my goals, I’d pay that much. I claim to be doing my financial planning all myself, but honestly it would be nice to know that I’m not totally screwing it all up. As they say, you pay for what you get.
I think that’s the key, MMD: what did they actually do to earn the money.
I am fortunate enough to have got to read such a content on a topic that I had been longing for. I didn’t have accurate knowledge regarding dealing with financial advisor. Thus your writing would actually work like a mentor to me. I have already bookmarked it and would look forward to more articles like this in future. Thank you so much for it.
No problem, Tom. Although it’s easy to malign advisor fees, there are people doing great work in those trenches.