This is definitely inside baseball talk so, if you're not in the financial services industry, it probably won't make sense to you. That said, you should probably understand what it means if you work with a financial advisor. This is my response to an article that appeared in Financial Advisor IQ entitled, Why Advisors’ Fees Are All Over the Map...

MY RESPONSE TO THE ARTICLE

In most cases, especially in the investment business, pricing anomalies like this are squeezed out of the system pretty quickly. Not sure if this article really answers the WHY question posed in the headline although Bob touches on it at the end. Lack of information on the part of advisors and clients partially explains it. But, after 30 years of working under the hood of advisor practices, I would offer some additional reasons to consider...

1. The set of deliverables offered by advisors varies tremendously. This applies to RIAs as well as registered reps. Even within the large brokerage firms, where reps work for a national brand, the mix of product and services sold by advisors is so different that, if it were not for the company logos on the client statements, it would be difficult to know that the advisors worked for the same company.
   
2. The only thing that differs more than the product and service mix is the knowledge and experience of the advisors. In other words, the quality of the "advice" itself varies greatly. Knowledge and experience (or lack thereof) is closely related to advisor confidence in their own professional worth. This certainly affects pricing decisions (such as whether to charge for planning or not) which are usually made or adjusted at the advisor level.
   
3. A wise man once told me that investments are sold and not bought. If you buy that, you might be led to another plausible explanation which is that, at the end of the day, financial advisors are sales people. Advisors are paid a commission or a fee to SELL investment products and services, period. That's not a good thing or a bad thing. It just is what it is. As Dan Ariely says so eloquently, "Your motivation can't help but influence your behavior."
   
4. The most plausible explanation of all (to me) is that most advisors today employ a pricing model that is not available to any other professional services group on the planet -- recurring asset based fees. If advisors charged by the hour, like most other professional service providers, this would be a moot discussion. By its very nature, the fee-based pricing model introduces huge inefficiencies into the system. For years, I have been preaching about the virtues of building a practice based on larger but fewer clients. The leverage that can be gained by doing this is impressive*. Consider the PROFITABILITY of managing as $5 million fee-based relationship versus a $500,000 one. While we may not want to talk about it publicly, this is the golden goose that allows this rare pricing inefficiency to exist. Why more advisors and firms don't capitalize on it is another story for another time.

* To appreciate this leverage please review the Lifetime Value of a Loyal Client chart below...

WHY SHOULD YOU CARE?
Start by reading this news release from FINRA. Here is the punch line: "Investors must be able to trust that the fees charged by their securities firm are, in fact, correct. When this is not the case, investor confidence is threatened." That was the conclusion by Brad Bennett, FINRA's Chief of Enforcement. This article was inspired by that FINRA news release.

If you are an INVESTOR, you may be getting over-charged and/or misinformed. If you are an ADVISOR you could face similar outcomes (to the ones described in the FINRA news release) if you or your firm are over-charging or misinforming clients. Unfortunately, many investors do not know which questions to ask their financial advisors. Many advisors place blind faith in their firms and the investment managers they use. Both of these "don't know what you don't know" (or don't care to know) scenarios can lead to disastrous results.

WHAT CAN YOU DO?
Even if you were not affected by this particular incident or do business with another financial institution, you should START ASKING MORE QUESTIONS OF YOUR FINANCIAL ADVISOR. Advisors and the companies they work for use any number of software programs to handle the accounting, portfolio management and performance reporting functions of their businesses – ALL OF WHICH CAN AFFECT THE FEES YOU PAY. More importantly, advisors and the various products and services they use to manage your accounts MAKE MANY ASSUMPTIONS when it comes to the critical decisions that can directly affect your financial well-being.

For example, most advisors use some type of asset allocation software to determine how your portfolio should be structured (stocks vs bonds vs international, etc). All of those programs use algorithms (to determine the appropriate asset mix) that are based on assumptions that may or may not be valid or realistic. One of the most important is the RATE OF RETURN EXPECTATION, also known as "capital market assumptions," that these and other financial planning programs use to crunch numbers. Think about this for a minute. If an advisor says you need to put away X dollars per year or have Y dollars in your retirement account by the time you reach 65 to provide you with a certain monthly income, there are mathematical assumptions being made. YOU SHOULD KNOW WHAT THOSE ASSUMPTIONS ARE. 

Listed below are some questions you should ask. If you do understand this, find someone who does and take time to learn it. Unless you have given your financial advisor legal discretion to trade on your behalf (which is unlikely) YOU are making the ultimate decisions when it comes to your investments. Technically speaking, your advisor is just making recommendations. I know this gets a little confusing for some people but it is VERY important since it can have a significant impact on your family's financial well being. Do NOT be surprised if your advisor cannot answer some or all of these questions. If you find that to be the case, you should re-evaluate your relationship and start looking for alternatives when it comes to financial advice. You will find some helpful resources below.

Help me understand how ALL fees are calculated on my accounts? Pay close attention to fee-based accounts which automatically debit your account based on portfolio values at specific points in time (e.g., quarter end)

What other fees am I paying that may not be “visible" in my accounts? Most investment products, especially mutual funds and annuities, have internal management fees (and other fees which are used to compensate financial advisors) that are NOT visible on your account statements. Find out how much you are paying and compare that to fees on competing products. [Be sure to get some objective input on that last point]

What assumptions are you making to formulate the advice you are giving me?  Specifically, what rate of return expectations are you using to determine my asset allocation?  What are those expectations based on?  What adjustments have you made to your assumptions in the past 12 months? When and why would you make changes to those assumptions?

What software programs are you using to analyze my portfolio and prepare my financial plan? What assumptions do those programs make (e.g., capital market assumptions)? When were those software programs last updated? What steps have you taken to ensure that you are using the best tools to formulate the advice you are giving me?

How do you select your (my) benchmarks? Benchmarks are "yardsticks" that let you know how your portfolio is doing. Examples include the S&P 500 and other indices that are used to measure the aggregate price levels of certain "baskets" of securities or entire asset classes. Your investment accounts are probably being compared to several benchmarks. Those benchmarks are usually selected by your advisor and/or the product and service providers he/she employs, such as mutual funds, money managers, etc.

PLEASE NOTE: Each asset class will have its own expected rate of return assumption. In the case of asset allocation software, the algorithms also make certain assumptions about the correlation of the various asset classes (i.e., to what degree their prices move together). All of these assumption, which are used to make critical investment and financial planning decisions ON YOUR BEHALF are usually based on historical data. This is what makes them so "iffy" and why it so important that you take the time to learn this stuff.