How to Charge for Financial Advice - Part 1

I have lost count at the number of different ways that we financial advisors have come up with to charge clients for our services. For the purposes of this post I will be discussing these fee structures:

• Commission (Now mostly in the insurance/annuity sector)

• Fee as a % of Assets Under Management (majority of advisors)

• Fee for service/hourly (no investment management)

• Flat Fee (Clients pay one fee for all services regardless of assets)

These seem to be the structures that I see most often and of course some advisors use a combination of these in their practice.

Last week in “How to be a Financial Advisor”, I ended with this:

If that is to be true, then there is no better place to start than with how our clients pay for our services.

We are all Thieves

Okay, that isn’t technically true, but you wouldn’t know it by listening to podcasts and reading blogs from leading personal finance content creators.

(Note: I am going to refer to these folks as creators. Not in a derogatory sense, but in the most accurate sense of the word. The majority of them make money through selling courses, affiliate marketing, AdSense, and/or crowd funding like Patreon. They literally create content that they use to make money.)

In fairness, I will point out that their ire is directly aimed at the Commission and AUM fee structures and not for the other two fee structures.

The gist of the argument to their audience is that our fees are a waste of their money and they are robbing their future selves. They use math to explain that a hypothetical advisor charging 1% actually costs an investor more than that due to the fees not remaining in the account to compound over time.

They provide a solution to the AUM or Commissioned fee structure send their audience out to fire advisors. The solution is almost always one of these three simple DIY structures:

• Target Date Funds

• Bogle 3 Fund

• Diamond Hands VTSAX

You know what? They are 100% right. The math is right and the advice to do something simple like one of those three options is also right.

But they are 100% wrong about human nature.

Sure, each creator will have examples from their audience of someone who follows their plan to the letter and is doing just fine. But, what about everyone else?

I can hear you chuckling.

Reality Bites

All of us could fill a book with stories of clients who call us in a panic to sell. (And why is it always at the bottom?) These clients are terrified they are going to lose everything when the market pulls back 10%. I imagine we each spend a great deal of our time talking clients off of the proverbial ledge.

I can’t imagine the number of people who try to DIY, watch the numbers fall, and blow themselves up.

Forget 1%.

I met a prospective client who was a DIY investor in 2017. He panicked when his portfolio fell to $5mm in 2008 and went to cash. When I met him in 2017 he had NEVER reentered the market.

I’m no mathematician, but even I can see that single decision cost him more than an AUM fee.

There are certainly a large number of people in the world that have the desire and ability to do just fine as a DIY investor. Great.

They would be terrible clients for someone who wants to provide advice and investment management. (In my experience they are also terrible planning only clients.)

We are Focused on the Wrong Thing

As I began thinking about how we charge for our services and the disdain the creators heap upon the vast majority of us who charge AUM, I realized something.

The focus of the ire is on the fee.

Not the fee in and of itself, but because there is a lack of perceived value in our work.*

I have yet to find a personal finance creator who doesn’t believe that there is value in paying someone for advice, planning, coaching, etc. The entire focus is on fees and what clients receive in return for those fees.

That is our fault.

The Challenge

I don’t want a creator to be able to point at our opaque fee structure anymore and tell people that we are robbing them. It is time for us to stop selling and start communicating the value we bring to our clients.

There are MILLIONS of people who want help, need help, and are paralyzed because what they hear about our compensation lines up with what they experience.

We ask people to trust us to manage their life savings and provide them advice on how to grow that savings to accomplish those goals.

That is a huge ask.

Fixing the way we are perceived seems small in comparison.

What’s Next?

Next week, in Part 2, I am going to find the bottom of the hole we have dug for ourselves and ask you to help me start filling it up.

The way to do that is for all of us to use the exact same fee structure. There is one fee structure that every advisor should use in their practice without question and I’ll tell you all about it next week.

(Meanwhile, stop digging please.)

See you next time I fire up the pit.

The Frugal Banker

*There is going to be some smart-aleck who says, “No man, it’s only about the fees.” Fine, take your HP 10bII+ and go do some TVM calculations or whatever.

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