A few months back, a family member asked me to attend a meeting with him and his wife on a visit to their financial advisor. He did not tell the advisor that I had been in the business, but just noted that I would attend. Before we walked into the office, he looked at me and said, "Look I like this guy and I trust him, so don't be too hard on him. Just see if we are getting a good deal." I did as instructed and was observing the advisor and his team go through their presentation. When it was time for questions, I asked specifically, "What exactly are they paying?" In the sense of how I phrased this question, I meant “not what are you charging.” The advisor replied proudly, "We only charge 1/2 a percent per year.” My family members had roughly 70% stocks and 30% bonds and I can tell you from my experience that this is a very good fee--or is it?
Allow me to explain.
You see, most financial advisors will answer that question the very same way, "I charge x amount.” But I asked a different question and it’s really the same question you are asking as well. What my family wanted to know and in fact what all of us want to know is this: What is the total cost? I would challenge you to think of any service you pay for such as an asset like your home, where this question is answered in this manner. When I bought my house I asked my realtor what the total price was. He did not answer the question by only telling me how much he charged for his commission. So why in the world would the question "What do I pay?" be answered differently by your financial advisor?
Now back to my family members. I told the advisor that the ½ a percent fee seemed very reasonable and followed up with asking how he had allocated the assets, which he showed me. What I noticed, of course, is that there were many different funds and money managers in his asset allocation. My follow up question then became, “So you charge 1/2 a percent and do you pay these managers too?" He looked a little startled and told me that in fact each manager had their own "discounted" fee. I then asked to see the “discounted fee." Reluctantly, he itemized each fee and here is the hidden conclusion: My family members were in fact paying 1/2 a percent to him, but the average additional expense was almost 1% more. Thus, my family members were paying triple what they thought.
Now was the advisor wrong?
Yes, but not because he is a bad guy--but because virtually every client who asks about fees asks the question the same way, "What do I pay you?" If that is the question then his stated answer of 1/2 a percent is technically correct. However, as I said, that’s not really the point of what you are asking. After we cleared that up, we went straight to performance. My family members had 12 different managers and only two of them had a track record which had beaten their indexes. Now this is an important point, because now we know that we are paying closer to 1.5% and indexes cost about 1/10 of a percent total. Seven out of 12 of these managers had underperformed by a full 2% over five years, but had a great 2012 year--so they had nice glossy reviews that looked good in the presentation.
This brings me back to the main point of likeability.
My family likes their advisor and quite candidly, I did too. He is well-spoken, attentive, conversational and is a happily married father--so what’s not to like? Here’s the real point. They liked him, but they were overpaying for his likeability. When I explained to my family members that they were paying three times the amount they initially thought and that 10 of the funds had underperformed, I then did some quick math. Had they only bought indexes, they would have paid $4,000 a year, without the service and the two annual reviews. In fact, they were paying in total (including all fees and underperformance) $46,000 a year.
What this really means is that they paid their financial advisor $42,000 for his likeability. Now, advisors are going to disagree with me because I am not including the financial plan asset allocation and it is difficult to look at one-year’s performance and assess the true value of an advisor. This is true. However, there is no argument that he is paying a premium and perhaps that is suitable. The solution to this dilemma is what is most important. In the end, we renegotiated the fee and went to less expensive managers, including indexes, and now they only pay $15,000 a year. My family was fine with paying for the advice and asset allocation--just not the $42,000 extra. In the end, the advisor keeps the business and my family keeps more money. Think about it--$42,000 is a lot of money and it’s our responsibility to know what we pay in total to have our money managed professionally.
It is for this very reason that we founded GuardVest. With GuardVest, you can find out at the click of a button exactly what you are paying, what your risk is and how your performance is tracking the index.
Do you know what you pay for the likeability factor? I’m willing to bet its way more than you think. At GuardVest, we don't give advice. We give you real simple data to determine if, in fact, you are getting a good deal for your advisor’s likeability factor.