[Editor's Note: The following guest post was submitted by Ryan Kelly, CFP, of RFK Capital Management. His firm recently transitioned from “fee-only” to an “advice-only” financial planning model. In this post, Ryan refers to Harry Sit, who I recently interviewed for the podcast (episode to run in February) and who will be speaking at WCICON20. Ryan is now an advertiser with us, one of our recommended financial advisors.]
- Commission
- Commission and fee
- Fee-only
More than 99.9% of financial advisors fit in one of these three models. There is wide consensus among the White Coat Investor community that fee-only is the best, least-conflicted model for receiving financial advice.
What Is The Financial Advice Only Model?
There is a fourth, lesser-known model that I believe deserves more attention among the White Coat Investor community. The model is called advice-only and is practiced by less than 0.1% of financial advisors. I recently transitioned my firm to advice-only and have studied this model for the past six months. Here are seven things I have learned about the advice-only model.
#1 Advice-Only Goes Beyond Fee-Only
Harry Sit, the author of The Finance Buff blog, has offered what I believe is the best definition of the advice-only model. You can find his definition here.
As Harry explains, a fee-only advisor and an advice-only advisor share the following characteristics:
- The advisor’s firm is a Registered Investment Adviser (RIA) registered with the SEC or at the state level.
- The advisor acts as a fiduciary and puts your interest first.
- The advisor has Certified Financial Planner (CFP®) certification, other professional credentials, or qualifying experience.
- The advisor does NOT sell products that pay the advisor a commission (cash-value life insurance, annuities, load funds, individual muni bonds, non-traded REITS, limited partnerships, etc).
- Advice-only goes above and beyond fee-only by adding:
- The advisor does NOT up-sell you on managing your money for a recurring fee either as a percentage of your asset value or on a monthly or annual retainer.
- The advisor does NOT, for a kickback or markup, refer you to someone else who will manage your money for a recurring fee. Recommending unaffiliated financial institutions is OK.
- The advisor strictly offers his or her advice for a fee. The advisor treats you as a competent adult able to follow the advice. Assistance in opening accounts or filling out forms is OK. Accepting prepayment for follow-ups or incidental questions that come up is OK.
To put it simply, advice-only means no commissions and no management of assets.
#2 Ongoing Investment Management Is a Highly Profitable Business
To understand the uniqueness of advice-only, it’s important to first understand that fee-only advisors become most profitable through the management of assets, not the giving of advice. Managing assets is the holy grail to the fee-only advisor for three reasons.
- It provides a future stream of recurring fee revenue.
- Fees can be deducted automatically from the client’s investment accounts—the “out of sight, out of mind” feature means most clients don’t understand the fee accrual over time, and how those fees are impacting long-term investment returns.
- Many ongoing investment management clients perceive there are high switching costs associated with moving their investment accounts and making a change in investment advisor. I’ve heard fee-only advisors describe their book of business as “sticky money”.
Ryan Kelly, CFP
#3 Advice-Only Advisors Draw a Clear Line Between Advice and Investment Management and Stay on the Advice Side
An advice-only advisor does not sell products for commissions AND does not offer an ongoing investment management service. If you look up an advice-only advisor’s ADV 1 and ADV 2, you will see the advisor does not earn commissions AND reports $0 in assets under management.
Why does an advice-only advisor choose to not offer ongoing investment management? Advice-only advisors feel the ongoing management of money is where superfluous fees grow on fertile ground, where transparency fades into darkness, and where unnecessary complexity multiplies.
They believe the advice-only model is a structural solution to minimizing potential conflicts of interest. It liberates them to focus on just giving advice and to promote self-reliance among their clients. Some have worked previously under both a commission model and a fee-only model.
Under the commission model, the advisor felt like a salesperson. Under the fee-only model, the advisor initially felt like an advisor but eventually felt like an asset gatherer or investment manager. Under the advice-only model, the advisor feels like an advisor.
A fee-only advisor who has assets under management and also offers hourly work has not drawn this hard line between advice and investment management. There’s an important difference between offering advice-only advice (to those who proactively request it) and being an advice-only advisor.
#4 Advice-Only Advisors Believe Most Investors Can Become Successful DIY Investors
The status quo has been that individuals need to delegate the ongoing management of their investment portfolios to a financial advisor to gain the needed confidence to invest. Advice-only advisors challenge this status quo. They believe that most individuals can, through working with an advice-only advisor, receive the needed confidence to manage their own investment portfolios using low-cost index funds.
#5 Advice-Only Advisors Believe Their Primary Value Proposition is Financial Planning
Wall Street Journal columnist Jason Zweig recently wrote,
Advisers who charge for their services through an investment-management fee while appearing to give financial planning away have trained the public to believe investing is arcane and expensive, while financial planning is mundane and unimportant. The opposite is closer to the truth: Investment management is a commodity whose market price has dropped close to zero, whereas the advice and judgement of a good financial planner can do wonders for your net worth.
Advice-only advisors believe strongly in the financial planning discipline. Financial planning can help an investor set attainable financial goals, manage risks, minimize taxes, pay down debt, and receive clarity on how to use money to increase happiness and well-being.
A financial plan provides the investor with the foundation needed to make good financial and investing decisions. The advice-only advisor seeks to add value by being a first-rate financial planner, and by helping clients build and write a personalized financial plan. The advisor can also provide guidance in helping the client implement the financial plan.
#6 Advice-Only Advisors Can Help Clients Fully Capture Long-Term Market Returns (Almost)
Advice-only clients have a unique cost advantage over clients using a traditional advisor. Since advice-only avoids a large recurring fee, the client can closely mirror the long-term returns of the stock and bond markets.
Case Studies
Mary has $100,000 of retirement assets, and in working with her advisor sets a goal to save $25,000 per year for her remaining 30 year working life. Mary sets a strategic asset allocation target of 80% stocks and 20% bonds; the advisor then helps her set up the needed investment accounts and invest in a few low-cost index funds to achieve the desired asset allocation. Mary pays a $3,000 flat fee for the financial plan and investment advice.
Over the 30-year accumulation phase, Mary decides to stay the course and never adjust the 80/20 asset allocation. She achieves a 5% per year real (after inflation) investment return. Along the way, she pays on average $200 per year (in 2020 dollars) for one hour of annual financial planning and investment advice. She pays the fees by writing a check out of her taxable brokerage account.
In the year 2050, Mary has $2,066,911 (in 2020 dollars) saved in her retirement accounts. She hires a new advice-only advisor (her previous advisor has now retired) to create a new financial plan to help guide her safely through the distribution phase of her retirement lifecycle.
She sets an asset allocation target of 50% stocks and 50% bonds and decides on a simple, low-cost Life Strategy index fund to simplify and automate her portfolio. Mary’s home is mortgage free and she plans to withdraw $60,000 per year (in 2020 dollars) from her retirement accounts to meet her living expenses. Mary pays $3,000 (in 2020 dollars) for the new plan. Over the next 30 years, until age 95, she achieves a 3% per year real, after-inflation investment return. She pays an average of $200 per year for financial planning and investment advice and maintains the 50/50 allocation. Let’s again assume that Mary paid advisory fees by writing checks out of her taxable brokerage account.
In the year 2080, when she is 95 years old, Mary will have $2,145,614 (in 2020 dollars) remaining in her investment accounts. Had she received all the advice for free, Mary would have been a pure DIY index investor and more fully captured the long-term stock and bond market returns, ending with a slightly higher retirement savings balance of $2,226,137.
- Mark hires a flat-fee advisor and pays a $5,000 (in 2020 dollars) annual flat fee. The advisor uses low-cost index funds to maintain the strategic asset allocation.
- Sue hires a 1% AUM advisor. Her advisor uses very low-cost index funds to maintain the strategic asset allocation.
- Sam hires a 1% AUM advisor. Sam’s advisor is also a commissioned broker. The same strategic asset allocation is maintained, but Sam ends up in funds that charge a 0.6% per year. His total annual fee is 1.6% of assets.
Here’s a chart showing the ending accumulation in the year 2080 for each investor.
Investment costs have a compounding effect over a long investment lifetime. John Bogle liked to say, “the magic of compounding returns is overwhelmed by the tyranny of compounding costs.”
As shown, the best outcome would have been achieved had Mary received free advice from the advice-only advisor. However, paying the advice-only advisor for financial planning and investment advice still allowed her to accumulate her fair share and capture long-term stock and bond market returns.
Mark, who paid the annual $5,000 retainer, had the next best outcome, as shown on the purple line. He ended with a retirement savings balance of $1,181,937.
Sue, paying the 1% advisory fee, had the next best outcome with an ending retirement savings balance of $693,164.
Sam had the worst outcome with an ending retirement savings balance of $122,323. Had Sam lived two more years, his retirement assets would have been depleted. The 1.6% annual fee drain over 60 years became a pound of flesh on his financial health in retirement. Sam is unaware at age 95 that he’d have $2 Million more had the asset allocation remained the same but no advisory fees or fund fees had been perpetually withdrawn from his accounts over his 60-year investment lifetime. The two hands in his retirement cookie jar took way more than their fair share.
#7 How to Find an Advice-Only Financial Advisor
Harry Sit has a unique service where for a $200 fee he will help you find an advice-only advisor in your area (or one out-of-state if you are comfortable working remotely). Here is a link to Harry’s advice-only website: www.adviceonlyfinancial.com. I also recommend reading through Harry’s FAQ section to learn more about the advice-only model. Thus far, Harry has identified 140 in the entire country who meet the requirements of advice-only. There are around 300,000 financial advisors in the country.
Harry will be a speaker at WCI CON 2020. It will be a great opportunity for attendees to ask Harry about advice-only.
It will be interesting to see if advice-only gains momentum and grows into an important player in the financial advice industry. The rate of growth for advice-only will increase as investors come to understand its value, as younger advisors become convinced it is a long-term sustainable model to build an RIA business, and as personal finance and investing writers help investors see it is a good way to receive good advice at a fair price.
[Editor's Note: I love the advice only model, but it has two flaws. The first is that it is difficult to make a good living doing it, which makes it less attractive to good advisors who want to do well while doing good. I've met many advisors who would like to try this model. Many are struggling financially and I've frankly told several to raise their fees so they can stay in business. This is a relatively minor flaw and can be overcome with good marketing and an efficient business.
The second and more significant flaw is that it eliminates an important service from the advisor's armamentarium–asset management. Why asset management is less important than financial planning or student loan advice or estate planning or retirement account administration or anything else an advisor does is completely beyond me. I do know why it has been carved out though–because it has been abused in the past. Fee-only advisors, particularly those charging an AUM fee, somehow got into the business of gathering assets instead of giving advice and providing service. Asset management was easier to automate and commoditize than personalized one on one financial planning. But advice-only throws the baby out with the bathwater. Just because the industry has overcharged for asset management (“let us manage your assets and we'll give you financial planning whenever you want for free”) doesn't mean it has no value whatsoever, that anyone can (and “should”) do it, and that there is no fair way to price it. While there are definitely people who want someone to teach them how to manage their own assets, I think they're probably a minority. Most people want a “money guy” who will take care of it all for them. And those people are more than willing to pay for asset management, they just want to make sure they're getting good advice (and service) at a fair price. Thus, fee-only can really only serve a certain percentage of those who wish to use a financial advisor. One can argue about how large that percentage is, but it will never be 100%. There will always be room for a good asset manager, even one charging AUM fees. But they will likely find the “fair price” for that service is only 0.1-0.3% a year, nowhere near the 1%+ currently charged by many.
What do you think of the advice only model? Does it do enough for the investor? If you're a DIYer, would you pay a flat fee for advice? Comment below!
Thank you for bringing light to this emerging business model. Hopefully more financial planners will go advice-only as it clearly aligns incentives and has the least conflicts of interest.
Another point: What the fiduciary “fee-only” folks don’t understand is that asset management is one service that might be provided. What about insurance sales? If the client needs term life insurance and you want to provide a good experience, you should sell that too! And disability! And if they need a SPIAs for retirement income–why is it that you can sell assets under management and be pure as the driven snow but you can’t sell a SPIA?
Financial planners aren’t lawyers and refer out estate planning. They aren’t insurance salespeople and refer out insurance. They aren’t CPAs and refer out taxes. Finally, true financial planners aren’t asset managers and they should refer that out too!
The true value of financial planning IS the ADVICE. That is the value add. Everything else needs to be viewed as a commodity and sold as such.
I agree AUM has been abused and that the advice only service is great for a segment of the population. But as WCI noted, I also believe delegating asset management is great for another subset of the market. The problem is more about fair pricing and methods of payment. What if someone is more of an outsourcer and wants to save time dealing with the responsibility of managing assets. What’s wrong with them writing a check (for a fair fee) to have someone take care of that for them?
Also it’s not fair to lump sales practices like selling insurance for a commission in with outsourcing services like asset management for a fee. The life insurance agent gets paid by the insurance company to sell a product to the customer. The asset manager gets paid by the customer to be responsible for managing their investments. One is selling. One is taking on tasks for a fee.
Maybe someday, life and disability insurers begin offering true no commissions products. If that occurs, some “fee-only” advisors will choose to begin offering life insurance placement as part of their services. In that case, then it becomes more like investment management.
Also, why does a true financial planner have to outsource everything? And how is it fair to assume exactly equal outcomes (less the fee) with hiring a financial planner that offers more services to a planner that outsources everything to a DIY investor that outsources nothing? How can the end outcomes be exactly the same for these scenarios. At the minimum, time spent on the given task will vary greatly.
The true financial planner should not have to outsource everything. In reality, the best model is probably the “family office” model where EVERYTHING is in house. Everything including insurance, taxes, estate, college planning, etc. But who can afford that?
Fee-only financial planners have turned the word “fiduciary” into nothing more than a marketing gimmick by thinking that AUM is the only service that should be provided, where as all the other services (taxes, insurance, etc) are somehow unholy.
You don’t have your CPA come to your house and balance your checkbook. You don’t have your doctor come to your home to administer your pills. Why do you have your financial planner manage your assets? To me, it is all the same.
I occasionally see something about a fee-only insurance model but it hasn’t seemed to catch on much.
I always wished I could car shop fee only- give a salesman (had a partner who used to sell cars) money for time showing you the models and advising, not a lottery win if you choose to buy and they get you paying more than you might pay elsewhere/ different salesman same car.
I am a HUGE fan of the advice only model. I find that most physicians want this approach. Even the “AUM” approach can be similar to advice only in the sense that a fixed flat fee can be charged, rather than a dynamic fee that is destined to go up as markets march forward over the years. Some clients just really simply do need AUM with a fixed flat fee as there is zero interest on their part in learning the basics. One of the more intriguing models I came across is when a client took the Fire Your Financial Adviser course and came to me to review their plan. I enjoyed that one a lot. AUM is often floated in the advertising world as a marker of prestige, but I don’t view it that way. We can take Jim’s parents as an example. He spends an hour per year on the rebalance. What do we call that? AUM with a fixed fee of zero, or an hourly fee of zero, or whatever number you want to substitute for zero.
A nervous diy investor might find this helpful as a check every once in a while. But I agree that most people want the hands off approach. Maybe that will change but I would not hold my breath.
As much as I wish that wasn’t true, I think it is true.
I agree that many DIY Investors want the completely hands off approach. But I would add that there’s this unique space on the continuum of financial advice that is largely unfilled. We have financial advisors who are primarily/solely interested in clients who want to delegate investment management. And we have first-rate writers and bloggers (great work, WCI, POF, and TPP!) who help investors fully DIY their investing and financial planning.
Those using the first method pay hundreds of thousands of dollars in fees for advice over an investment lifetime. Those using the second method will pay almost nothing for advice over an investment lifetime, but will need to make a significant front-end loaded investment of personal time to learn to effectively DIY.
If you believe in passive investing, then the advice-only method may not make sense for everyone, but it does make sense for a large segment of investors. Yes, those who are experienced DIYers and just want a second opinion should only pay for one or two hours of financial advice. But those who know very little about financial planning and investing can still be well served by an advice-only advisor. They can receive a personalized financial plan, answers to questions, and instructions/guidance on implementing the plan. All that is required is that the client be willing to follow instructions. Very little ongoing work is required because the investment strategy is passive. Rick Ferri’s mom and Dr. Dahle’s parents have used the advice-only method, and I would argue are being extremely well served by it :-).
Advice-only my foot. They’re mostly just getting asset management and encouragement to spend their money.
They are getting superb investment advice and are following that advice! You’re a good son to do the required few clicks of a mouse button, once a year, on their behalf. Best of luck trying to get them to spend their money — if they don’t follow your advice, their heirs (charity or family) won’t complain 🙂
Agree it would be hard to keep the lights on with the tiny sliver of people that fit the niche: need advice but are still comfortable doing the actual work. I mean, one would think that most of those folks would sort themselves out with Bogleheads and WCI forums…doesn’t leave many people to advise!
Having an advice-only component would be good to have in the options menu for a traditional adviser.
My latest tweet: Great description of the features and definition of Fee-Only Advice (that’s me) via @WCInvestor: http://bit.ly/2YkQyuP
Yes, it’s only a subset of the population and yes you can make a good living in this model if you work it like a business and help high income professionals with night and weekend appointments. You can also work remotely two months a year in Italy if you plan it right. Saving people from making costly mistakes is one of the real value adds to this model.
This different revenue models simply illustrate that costs have a significant impact on long term returns.
The need and quality of the “advice” and the cost of the advice is being carved out separately is great. That gives one the option of paying a lower cost. Great option if one is capable of handling everything else DIY.
Downside:
• Quality of advice-is it as probing and as thorough?
• Advisor’s revenue stream is primarily based on volume. That has to impact the amount of time devoted to each engagement.
• A new client with no concept of asset allocation or risk assessment is a completely different client than a DIY that needs much less education or assistance. How is that factored in? Do you reject clients as being “unprofitable” or leave them at risk?
How do you handle phone calls like “Tell me again why I have 40% in this bond fund?”
•What does a client do when the “advice only” person is no longer available?
I love the low cost option for a DIY. I would be concerned with a misunderstanding about the scope of services.
Thank you for the article.
Tim,
These are very good and valid points. Here are my thoughts on each:
1. In terms of thoroughness, there seems to be a range among advice-only advisors. On one end, you have Rick Ferri who typically spends just one to three hours per client. He focuses on investing and does not do comprehensive financial planning. The client sends him information regarding their investment holdings, they have a phone call, and then Rick writes a letter summarizing his recommendations. His clients are either looking for validation or have a complex portfolio and want advice on transitioning to a simple portfolio.
On the other end, you have advice-only advisors who provide very comprehensive and thorough financial planning. This group meets the advice-only definition, but they tend to call themselves “project-based” financial planners. One example is Holly Donaldson. My sense is Holly primarily works with those transitioning from the accumulation phase to the distribution/retired phase which does typically demand thorough financial planning (advice on medicare, social security, long-term care, retirement distribution planning, basic estate planning issues, etc). My guess is Holly spends about 15 to 25 hours on each client project. I believe that’s enough time to provide very thorough and comprehensive financial planning.
2. Yes, revenue stream is all about volume for the advice-only advisor. The business model is all about billable hours (or quantity of onetime, fixed fee projects — what I focus on). And there’s a need to generate a steady inflow of new clients because of the lack of recurring revenue from existing clients. But I think an advice-only advisor can still provide the needed attention to each client.
3. Your third point is a real concern for the advice-only advisor. Advice-only advisors, overtime, will cater to and attract a certain type of investor. Some focus on DIYers who are very savvy and just want a second opinion. Others (like Allan Roth) focus on older, wealthier investors who tend to have a very complex portfolio (made complex by a high-cost financial advisor) and want to transition to a simple indexed portfolio but want to be very sensitive to tax consequences. My clients tend to be younger, high-income working professionals in the accumulation phase who want a personalized financial plan, want to use index funds for their investing, want to automate their finances and keep things simple, and want some guidance and support in implementing the financial plan. I offer a free consultation and am getting better at identifying clients who would not be a good fit for my approach — I try to refer them to someone who I think would be a better fit.
4. Good point, but an investor using a traditional financial advisor to manage her portfolio would have the same issue.
What unites most advice-only advisors is they tend to believe investing is primarily a decision making process that does not demand much ongoing work. They like John Bogle’s quote about investing, “Don’t do something, just stand there.”
Thanks again for making these valid points.
Have always been advice only. So i cannot compare it to anything else. But i like it! BTW i am 65 y.o. HOWEVER someday i may be 95 y.o. and i doubt my eyesight etc. will be good enough to be advice only. Not sure what to do then. Go completely to cash? Lots of time to think about it…
Thank you Ryan for highlighting the Advice-Only model. Just a small nitpick with #4, which might also address some of Dr. Dahle’s reservation. Clients following advice from an Advice-Only advisor aren’t becoming DIY investors, in the same way that patients taking medications prescribed by a doctor aren’t becoming self-treating patients. They only need to follow specific instructions. It still works if they don’t care to know the underlying reasons for the instructions.
Asset management is the opposite of hiring someone to mow your lawn every week. In mowing your lawn, you know exactly what to do, but you just don’t want to do it because it takes time week in and week out. In asset management, once you are told exactly what to do, actually doing it doesn’t take much time or effort. While in theory an advisor can charge $500/year for execution in addition to a price for advice, in practice once you signal that you can’t be bothered to log in to your accounts even once in a year, you will get charged a high fee for such privilege.
Thank you, Harry, for this important nitpick. I completely agree, and I wish I would have articulated this as well as you have here. My favorite line in your definition of advice-only is “The advisor treats you as a competent adult able to follow the advice.”
The advice-only model works for anyone who is willing to follow simple instructions. My clients are technically DIY investors, but being a DIY investor is so much different than being a DIY electrician or DIY auto mechanic. It doesn’t require technical training, it just requires the client to follow simple instructions.
On a related note, if you believe in the indexing philosophy, then investing in stocks and bonds is primarily a front-end loaded decision making process. As you said, once you are told what to do, it doesn’t take much time or effort.
I love this quote! “The advisor treats you as a competent adult able to follow the advice.”
That explains why the hard-sell AUM guy I spoke to yesterday was so into talking down to me – he doesn’t make money from helping people be competent adults.
A great overview and discussion comments.
As far as investment portfolio management, it would seem to me than an excellent Advice-Only advisor would do the similar activities that the other types of advisors do regarding investment portfolios and provide a written plan — risk tolerance, income needs, asset allocation, basic tax considerations/asset location, rebalancing, tax loss harvesting, etc. This would seem to form the guide for a DIY investor.
The task then seems to boil down for the DIY investor is where and how to implement and manage ongoing within parameters of the guide.
I’m exploring M1 Finance’s no-commission, no-fee platform for the implementation and ongoing management aspects. The platform seems to provide all the basics for DIY investor management except automated tax loss harvesting if the portfolio is built from ETFs and/or individual stocks [no mutual funds]. Lyn Alden’s free investment strategy newsletter, https://www.lynalden.com/investing-newsletter/ , seems to provide a good example of M1 Finance’s platform in the model M1 Finance portfolio she includes in the newsletter.
I would appreciate Dr. Dahl’s and others’ comments on M1 Finance as a suitable platform for DIY investors.
“Tip-of-the-hat” to Harry Sit for articulating this so masterfully, and thank you to Ryan Kelly and all others who help people plan and succeed this way!
I would suggest adding a level of sophistication to Advice Only advising….Advice only, but also add in some serious research into Private Equity investing. This is a whole different world where there are good companies in the Real Estate, and Oil and Gas sectors that I would argue are good long term investments for high net worth individuals. This would likely supplement your current model and at the same time opening up a new world of investments to people without the time to do the research. Of course there is a large up front time commitment on your side to learn about the businesses/companies that best fit your clients investment goals.
Thanks for the post.
Thank you for the suggestion. My prior boss worked for a prestigious private equity fund, so I have a base level of understanding with private equity investing. I’ve thought of providing advice-only advice to ultra-high net worth investors with their private-equity investing. But I would only provide general advice (help them determine what percentage of their net worth to devote to private equity investing, provide a third-party review of the investment returns and fees charged by private equity funds, help them understand the risks and tax consequences of private equity investing, etc).
For sure that would be a huge value add. The attitude among most (even very good) advisors seems to be “if it doesn’t have daily liquidity and come from Vanguard or DFA you shouldn’t even look at it.” But I understand why advisors don’t offer that service. It would be a ton of work with a ton of risk. “But you said RealtyShares was okay and then they went out of business!”
Jim what do you mean by “most advisors”? Very few advisors recommend DFA or Vanguard. Maybe most that advertise on your site. Most advisors believe in active management. And they charge high fees for it. And some of those do recommend private equity investments. If you believe in active management, and are willing to pay for it, there are many advisors who offer this service. But you’re right, it is a lot of work and risk, and you won’t get it for $1,000 flat fee. Most of us who offer flat fees or hourly work believe that the costs of active management outweigh the benefits, so we stick with low-cost,liquid asset class investments. That doesn’t mean that you shouldn’t own private equity, but you just can’t get it in a low-cost, diversified portfolio.
All that advertise on my site you mean.
how difficult can it be to manage the bogleheads THREE FUND PORTFOLIO
As Bernstein says in “IF YOU CAN”, a 7th grader can be taught this stuff easily
Glad to see the comments on this staying civil. I know people have been burned by FAs in the past, but some of the anger on WCI forum and Facebook page are really unnecessary. Some financial advisors might genuinely want to contribute something to the conversation. Newsflash: not everyone is a DIY kind of person!
I have far more control over what people say on the blog and in the comments. It takes a lot of time to read every post on the forum and is pretty much impossible in the FB group.
with passive funds surpassing active, investors are learning what works best
could not imagine myself paying 30-40k/yr for aum fees
have seen many portfolios totally complex to make the investor feel he is not capable of being a DIY investor; sad but very very true
Yes, I call that the “negative feedback loop of complexity” that continues to convince many that investing is complicated, involves ongoing and complex work, and thus you need to pay large fees in perpetuity. This negative feedback loops continues to cost American investors hundreds of billions in fees every year.
Fee only Advisor….evaluate and charge a fee for advise
Evaluating asset allocation in relation to income and age should be one of the things you monitor and advise on if necessary. If the client wants you to do it, charge a fee and do it
I see this as a great service for DIY investors to refer people to. I frequently get questions about personal finance, and if it’s not something I can easily answer, I send them to whitecoatinvestor. Realistically though I realize most of these people aren’t going to hunt down and pour through a post that’s relevant to their situation. Alternatively I can suggest they get a fee only advisor, but the minimum investment and minimum fees are more than most people in my sphere will (knowingly) pay. I wish there were an advice only advisor I could send people to who could get them on the right track for a reasonable price.
Take a look at the Garrett Planning Network. Most are hourly advisors although some do AUM: https://garrettplanningnetwork.com/
Conflict: I’m a 17 year member.
I didn’t realize any Garrett planners charged AUM fees.
I like the Garrett Planning Network, and I especially like those planners (like you) who have remained committed to the hourly/advice-only model and have been successful doing so.
I think that’s a great comment. That’s exactly the place for these folks.
With money in index funds surpassing active funds, Americans are learning the best way to invest
Amazing article! I’m a 10 year financial advisor that recently opened my own business exclusively as advice only. I thought I was alone in offering this and am glad to hear that there are a small few doing it as well. Thank you to Harry Sit for bringing this to light! The biggest reason I went with this model was to completely eliminate conflict of interest. Two good examples of this are:
1) What will an AUM advisor tell you if you ask them if it’s better to pay off debt or invest with them? I know the answer will vary based on many variables, but you can’t argue that there is zero conflict here for the advisor.
2) A client has a great investment property opportunity and they call their AUM advisor to help evaluate it. It will require them to take out $150,000 from AUM. Is the advisor going to be inclined to like or dislike this investment property idea?
It’s quite freeing to be able to, for a transparent monthly fee, go anywhere with my advice and advise clients truly in their best interest.
Agreed, those are two conflicts of interest for AUM charging advisors.
Of course, they would argue you have a conflict of interest to talk/work slower or recommend more frequent meetings or make things sound more complicated than they are etc. Impossible to get paid without any conflict of interest at all.
I love the quote “no conflicts, no interest.” It’s impossible to eliminate conflicts of interest, but the right structure can minimize conflicts. And I believe purely advice-only can get the conflict of interest score (on a scale of 1 to 10) down to a 3 or lower. A salesperson selling IUL is an 11 on the scale, in my opinion.
Eric, very glad you enjoyed the article. Best of luck with the advice-only model!
Love the scale. Maybe an advice only guy is a 3 and an AUM guy is a 4 or 5, dunno. But since they’re offering different services, it’s hard to compare apples to apples there.
In “IF YOU CAN” Bernstein states a 7th GRADER CAN LEARN THIS STUFF
5 states now teach finance and hopefully every child will have this important education
As an advice only adviser for 17+ years, I’d like to add one more to the great list of 7.
Advice only minimizes (but doesn’t eliminate) conflicts of interests. AUM and commission have the incentive to capture assets. Hourly can more objectively evaluate decisions like:
– Should I pay off the mortgage (mortgage is the inverse of a bond)?
– Should I roll over my 401K to an IRA?
– Should I take a lump sum pension or a monthly payout?
– Should I take Social Security now or defer.
AUM or commission models have far more conflicts in these types of decisions and even the best AUM advisers are impacted by these incentives.
Thank you, Allan. I love that the advice-only model helps me be more objective in offering advice on paying down a mortgage, rolling over a 401k, hiw to best claim pension benefits, and when to claim social security benefits.
Btw, you commenting on my aritcle seems to me similar to Michael Jordan commenting on a basketball article. Thank you!
Don’t you identify yourself everywhere online as following the fee-only methodology?
I only get paid directly from the client, which makes me fee-only. I also very recently (as mentioned in this article) transitioned to not offering ongoing investment management. I also don’t receive (and have never received) any type of revenue share or kickback for recommending a particular investment management service to a client. This makes me advice-only according to Harry’s definition.
I don’t think I’ve “overly” emphasized being fee-only, even before I made this recent transition.
Asking Allan and hit “reply” under his comment. That’s weird. I’ll ask again…Don’t you identify yourself everywhere online as following the fee-only methodology?
Great post guys!
We lucked out in 1992 dodging a bullet. Met a charming history buff who proposed managing our fortune for us and explained he just wanted 100 client-families paying him $1500 a year. Was setting up to transfer stuff to his care but his math fell short- and he didn’t properly bluff through the problem- when I pointed out that cashing out all our IRAs to go to his company would take a big tax bite, decreasing the amount invested and thus throwing off his predictions for our future wealth. I hadn’t even absorbed that he no doubt got big commissions on all his sales of company products. When he ignored my concern re tax bite (especially all in one year) we ended the process. Think his product was annuities of some kind, with no doubt a faulty prediction of returns and no mention of commissions and fees. Fort Bragg, NC IIRC.
Great Article! I’m deciding whether to start an advice-only RIA vs. a fee-only RIA. I’m tempted to do advice-only, but my only hesitation is that when I was fee only in the past (primarily for physicians), of the roughly 20% of my clients who wanted to pay for advice and then do DIY investing, at least half of them didn’t follow through properly with the DIY investing and then I had to either answer TONS of emails from them (and I realized I didn’t charge enough for all the hand-holding) or if they didn’t ask questions, they often simply skipped steps. I still got paid if they skipped steps but I felt bad that their plan was not being carried out properly. Any thoughts on this dilemma? Are there certain platforms that make DIY investing easier? My clients were mostly using Wealthfront, Vanguard, Fidelity or Schwab. I’d make custom portfolios for them with Vanguard and Fidelity, which is the part that wasn’t working. So if I went advice only- what is the easiest DIY method where clients actually pull off DIY investing correctly? Also, since I plan to not focus only on physicians this time- (I want to help middle-class changemakers, too) perhaps other populations have more time for DIY investing? Thoughts? Thank you!
Follow ups cost money.
Read the editors note in the article.
Consider advice-only with an annual checkup, Repeat clients might be very comfortable with that arrangement.
Thanks, Tim! Yes- agreed- I had several fee clients come and go in my years as a fee planner. Some wanted hourly, some a flat rate, but they returned.
Yea, it’s a real issue.
There certainly are plenty of investors out there who would do better with a “full service” advisor, even if they had to pay a reasonable fee for it. The trick is figuring out whether an investor is a real DIYer, an advice only DIYer, or someone who needs a full service advisor.
Certainly I think AUM is the best way to make money as a fee-only advisor. Decreasing workload and increasing income each year. Can’t beat that.
Thanks! Yes, agreed that AUM is an easier way to make money long-term, especially if you mostly have higher net-worth clients. I may end up building a practice to serve the middle class so advice-only might end up being an okay route with enough volume but I’ll keep considering the pros/cons of advice-only vs. offering AUM.
Thanks, Tim! Yes- agreed- I had several fee clients come and go in my years as a fee planner. Some wanted hourly, some a flat rate, but they returned.