Fees vs. Value

There has been much discussion regarding the fees that advisors charge in the financial media over the last year or so.  Some of this has come about due to the success of low-cost index funds in a bull market and some of this discussion is the result of the success of "robo-advisors" or, more appropriately, "robo-allocators" and their computer-driven, internet-based, low-cost model.  The proliferation of lower-cost exchange-traded funds (ETFs) in the recent past has also brought more attention to this issue.

I have always believed that our fee schedule for assets under management (AUM) was both competitive and fair.  In the latest Schwab Benchmarking Study, conducted by Charles Schwab & Co., our firm's fee structure was shown to be below the median fee charged by similar advisors until the client's portfolio reaches $10 million.  This study gathered data from 1,133 advisors, which is a reasonable universe for adequate comparison, in my opinion.  While I am aware that some of the robo-allocators perform re-balancing and tax-loss harvesting for an even lower fee, there is no real financial planning advice being given by these companies, nor is there any actual human being available for financial questions.  There are a couple of exceptions to this; one of these firms does have Certified Financial Planners manning the phones, but according to this firm's ADV, filed with the Securities and Exchange Commission, its AUM fee schedule is very comparable to ours.

The catalyst for this particular blog post was brought about by a post on the Squared Away Blog, in which the author explained that fees were why she fired her advisor.   This post can be found here,  http://t.co/YoVlkM7zAb  While she may have a point, at her age 58 and her spouse's age 61, the fees charged by the advisor are not the critical component that will, as she says, "preserve our nest egg."  That will be determined by future returns, withdrawal rates, how she reacts in times of market stress, and how big that nest egg is today.  What was of greater interest to me, however, were the comments from readers of the article.    Most were very good; some very objective comments by financial advisors, the typical "I do it myself and have never lost money" response, the Vanguard zealots, and always the guy who wants a "pay-for-performance" model that is used by hedge funds, which is not a viable alternative for most advisors or investors due to SEC regulations.  I am always tempted to add a comment in these instances, but I thought I would use this pulpit instead so I could drone on and on in a less public forum.

I have a fairly large lot on which my house sits – about ¾ of an acre, with overly abundant shade.  Over the years, I have both handled the seeding, fertilization, aeration and verti-cutting myself, but have also delegated that responsibility to lawn services.  The net result is that no matter who does the work, all that shade still results in a sub-par lawn.  I still harbor hope, however, that a lawn service will have better success than I will, and I am willing to pay for that service.  Perhaps the state of my lawn is not an apt comparison with paying fees
to a financial advisor, but it is another example of outsourcing a service that we are either unwilling or unable to handle ourselves.  The difference in failure here is that my lawn has a dirt patch in August, versus not having been able to achieve a secure retirement, or some other financial goal. Each of us harbor a certain bias against paying for some services.  A recent article in the New York Times highlights both the difficulty of finding the right provider of financial advice, and our unwillingness to pursue that advice. http://www.nytimes.com/2015/04/04/your-money/why-paying-for-financial-advice-makes-sense.html?_r=2&emc=rss&partner=rss

Does every advisor add value all the time?  Of course not, although it seems that some clients would hold their advisors to that standard.  However, I have been witness to situations in which a piece of advice we have delivered was worth more than a year's (or several years') fees in either tax savings or preservation of capital.  This debate regarding fees will likely never be over.  Like a number of things in life, you will only know if the choice you made today is the right one many years from now.  Fees are a factor in your relationship with a financial advisor and success with your financial goals, but only one of many.