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Why ARE Financial Advisors’ Fees All Over the Map?

6/3/2013

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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...
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