By Dr. Jim Dahle, WCI Founder

Over the last couple of decades, I have spent a great deal of time thinking about financial advisory firms. I have often asked myself, “If you could design a firm from the ground up, what would it look like?” The answer to that question has evolved a bit over the years, but it's mostly just become more comprehensive as I have learned more about the issues faced by well-intentioned advisors and their clients alike.

Today, I'm going to share what that vision looks like.

 

Good Advice at a Fair Price

The mantra I've been using for years when describing a good financial advisor is “good advice at a fair price.” Everybody nods their head when they hear that. It makes sense to us, but the devil is in the details. Today, let's talk about what I mean by good advice at a fair price. But I'm also going to discuss a lot of other issues faced by advisors and their firms that you may not have ever considered.

 

What Is a Fair Price?

The first item to discuss, only because it's the easier of the two parts to talk about, is what I mean when I say a fair price. There is actually a lot that goes into that.

 

Fee-Only

The first thing I like to see from a financial advisor is that they are “fee-only.” This means the advisor only gets paid for their advice and service, and the advisor only gets paid by you (and clients like you). There is no secondary source of revenue for them. They are not paid commissions for selling you life insurance products or loaded mutual funds. They are paid fees by clients, just like your accountant, attorney, doctor, or other real professional. Those fees might be in the form of an hourly fee, a monthly/quarterly/annual subscription fee, or an Asset Under Management (AUM) fee, but they're fees, not commissions. There is always a conflict of interest when money changes hands, but a fee-only relationship eliminates the worst of the conflicts of interest in the financial services industry.

 

Transparent Fees

Along with being fee-only, the best advisors are also overly transparent about their fees. In fact, it's usually a bad sign if the fees aren't on the website in a place where they can be rapidly found and easily understood early in the due diligence process. No matter how the fees are calculated, the best firms will ensure that their clients know exactly how much they're paying each year for advice and service. I know what I pay my attorney and accountant. I should know how much I pay my financial advisor.

 

Deal with the AUM Issue

These days, some people view AUM fee-charging advisors as being nearly as bad as a commissioned agent when it comes to conflicted advice. I do not, as discussed in a recent post on the topic. However, issues exist if your advisor is compensated primarily by an AUM fee.

The first is that lots of advisors charging AUM fees are not transparent. Using an AUM fee-charging advisor requires you to do a simple math equation each year to calculate your fees. Wouldn't it be nice if the advisor just did that math for you and put the total in a prominent place on the periodic reports they send you?

The second issue is that AUM fees are often not fair. They're not fair to the advisor when the client has a tiny portfolio early in the investing journey. And more importantly, they're not fair to the client once the client starts really building wealth. Why not just charge a fair fee every year?

Another issue with AUM fees is that they incentivize the advisor to gather assets rather than provide service and advice. The focus becomes too much on investment management and not enough on what is actually the more important and valuable service: financial planning.

The usual solution to these AUM issues is to use a flat fee pricing model, and there is little reason for most clients to pay anything else. However, it doesn't really make sense to charge the exact same fee to someone with a $1 million portfolio and someone with a $30 million portfolio. The financial life of the $30 million investor is typically substantially more complicated, their expectations for their advisor are quite a bit higher, and the advisor's financial liability for mistakes is a lot bigger. It makes sense to pay a higher fee. But that fee shouldn't be 30 times higher. Maybe it shouldn't even be three times higher. But it should be higher.

The best advisors generally charge that higher fee in one of several ways, whether that be a tiered flat fee or a low AUM fee starting at a certain level of assets on top of the base flat fee.

 

Comparable to Other High Quality Advisors

Most new investors have no idea what the going rate is for high-quality financial advice and service. So, I tell them. These days, the answer for most WCIers is typically between $7,500-$15,000 a year for a “full-service” advisor. You know where I get that answer from? We've been referring white coat investors to the “good people” in the industry for the last 15 years. This is what they're currently charging. You don't need to find the least expensive advisor you can; you just need to make sure they're in the right ballpark ($12,000 is a fair price for typical services; $75,000 is not).

 

The Firm Needs to Be Profitable

I've met a few advisory firms out there that offer very low prices. They make enough that the advisor has created themselves a good job but nothing more. Some of these have struggled to stay in business. There is no additional capital or profit that can be used to grow the business and help more people (i.e., hire more advisors) or add new services for the existing clients. A reasonable profit is necessary for the longevity and success of the ideal advisory firm.

More information here:

The Perfect Financial Advisor

 

What Good Advice and the Ideal Firm Look Like

Good advice at a fair price. That's the goal. We've talked about what a fair price looks like. Now, let's talk about good advice.

 

Planning First

Far too many “advisors,” along with investors, think financial advice is just investment management. Perhaps that is due to the AUM fee model that focuses so much attention on the amount of assets. Maybe it is because people mistakenly think the point of hiring an advisor is to beat the market. Perhaps it is just because investing is the sexy part of personal finance. However, the more time I spend in the financial space, the more I realize the real value is NOT in investment management. The real value is in the financial planning.

Financial planning is far harder to deliver to a client, far harder to do well, and far harder to scale. Once you learn about how index mutual funds trounce the vast majority of their actively managed competitors and how easy basic fund management can be, you can guarantee yourself the market return with 30 seconds of work and almost no expense. Planning the cash flow for a family that has never budgeted is far more work than that. Add in insurance planning, student loan planning, estate planning, asset protection, retirement projections, college savings, muddling through multiple retirement account rules, and all the other stuff that a real financial planner does, and it doesn't take long to see that investment management is the easy part.

In reality, there is no point to investment management without an underlying plan. You can't even properly choose what to invest in until you have set your financial goals and have a plan. Yes, lots of people need help with investment management. But it really is not that hard to do well these days.

Good financial advice talks about you and what you want out of life. It doesn't talk about products. It finishes with a solid written plan—not the sale of an insurance policy, annuity, or investing product designed to be sold, not bought. It acknowledges that the advisor's crystal ball is just about as murky as yours is, and your plan needs to account for that uncertainty. Good advice comes from an advisor who focuses on clients like you. You want an advisor who has already helped solve the problems you need solved. Good advice recognizes that your greatest enemies are inflation, taxes, and your own behavior. It really doesn't change year to year or even decade to decade. Your portfolio should change when your life changes, not when the markets change.

 

A Great Advisory Firm Serves Both Validators and Delegators

Perhaps the greatest challenge early in your financial life is figuring out what kind of investor you are: Delegator, Validator, or Do-It-Yourselfer (DIYers).

Delegators tend to be busy and not all that interested in the intricacies of financial planning, and they are more than willing to pay a fair price for good service. They are not hobbyists, and none of their favorite books are about financial topics. Just like some of us pay for housekeeping or lawn service, delegators pay for financial planning and investment management.

DIYers are hobbyists who tend to be very fee-sensitive but have so much interest in personal finance and investing that they rapidly develop both financial literacy and financial discipline. It is possible to be your own effective financial planner and investment manager. If you do your job as well as a professional, the fee savings will speed you along the way to meeting your financial goals.

In between DIYers and delegators is a large and varied group referred to as Validators. They prefer to do some but not all of the tasks performed by a full-service financial planner and investment manager for their delegator clients. They also want to pay a lower fee for that lower level of service. This group has traditionally been very hard for the financial services industry to serve in an effective way, but it's very important to me that a firm also offers options that serve validators. That likely means an “advice-only” style relationship. Perhaps that looks like consultations paid with hourly fees. Perhaps it looks like drafting a financial plan and letting the client implement it. Maybe it looks like just helping with a plan for your student loans (like can be found at studentloanadvice.com).

A great advisory firm should serve both validators and delegators. It needs the ability to serve as a one-stop shop for the delegators looking to offload most of the hassle in their financial lives. It needs to serve the needs of validators. It should also be viewed by DIYers as a safe place to send their less financially interested partner in the event that something happens to the DIYer.

 

Must Have the Ability to Scale

Another problem WCI has dealt with over the years may not be obvious to most WCIers. Many of the best financial advisors I've ever met are in one advisor shops. They run their own little business. Perhaps they have an employee or two, but they have no interest in hiring advisors to work under them or building a huge business. These firms generally top out at 75-100 families being served. At that point, the advisor is as busy as they want to be and does not need to look for any new clients. Some of the best advisors I know are those who used to be on our recommended list but came off it when their practices filled.

More than 30,000 docs come out of training every year, and the majority of them need a good advisor. Even if we had 50 of these one-advisor shops on our list, they could all be filled just with a single year of graduates. So, we try to keep the list as full as we can with advisors who are “good enough” and who are still trying to fill their practice. Determining what is “good enough” to be on that list has caused me more angst than anything else over the years. A few of these companies are trying to scale up their practices by hiring additional advisors (and so continue to advertise with us and continue to serve WCIers), but our partnership with most of those who offer good advice at a fair price only lasts a few years. It's not because they're bad advisors; it's because they're good advisors.

The ideal advisory firm must have the ability to scale. There are simply too many people to serve to do it well with one advisor shops. The tricky part, of course, is maintaining culture and quality as you hire more and more advisors.

 

Advisors Advise, Not Market

One major problem with the financial services industry is that the most successful advisors are not the ones who give the best advice. They're the ones who are the best at prospecting for new clients; marketing themselves; and, mostly, selling products. The best salespeople become the “top” advisors. But the advisors you really want—the ones who are focused on their clients' success instead of their own and the ones who give the best advice—are usually not the best salespeople, much less the best marketers. Yet those are precisely the advisors we want in the ideal firm. They become even better advisors as time goes on when they spend all their time, energy, and focus on advising and serving, not prospecting and selling.

The ideal firm attracts these top talents by promising them a job where they get paid fairly to do what they want, which is to spend their time planning with their clients rather than forcing them to prospect, market, and sell. This results in happier, more effective advisors and more successful clients. Which is the whole point. Put the best advisors with the best clients, and you shouldn't be surprised when the firm succeeds. WCI refers hundreds or perhaps thousands of white coat investors to our recommended financial advisors every year. Some of the best physician-focused financial advisors have acknowledged to us that the majority of their clients came right from WCI.

 

Trust Companies

Over the years, WCI has looked into partnering with, purchasing, or even starting a financial advisory firm, essentially bringing this “product line” in-house—the same way we have done with our courses; conference; student loan advice; and, in some ways, insurance referrals. We've discovered the compliance landscape is complicated, especially for a multi-media company like WCI. Most financial advisory firms are Registered Investment Advisors (RIAs) regulated federally by FINRA and the SEC. The relationship between federal regulators and RIAs would best be described as “antagonistic.” It's not the regulators' fault. They're mostly just trying to protect investors from predatory firms and outright scammers.

But what if there were a better way?

It turns out there is. In fact, the highest fiduciary standard out there is not the one carried by an RIA but rather the one carried by a trust company. A trust company is a type of non-depository bank. Its fiduciary standard legally obligates it to act in the best interests of the trust's beneficiaries, prioritizing loyalty, care, and impartiality while avoiding conflicts of interest and self-dealing. A trust company is required to manage assets prudently, maintain transparency, keep meticulous records, and act in good faith, ensuring they uphold the highest level of fiduciary standard for their clients.

Trust company structure also sets up the advisory firm to offer additional services for the few clients who may need them. These services may include family office services and, obviously, trust management services, both of which are potential future needs for some WCIers. Trust companies are also regulated at the state level, where compliance and regulation are done in a much less antagonistic, less confrontational way (even though it's just as, if not more, strict).

As I've looked into financial advisory company structure over the years, I've realized that an RIA is good, but a trust company may even be better. Thus, the ideal advisory firm can be a trust company. Why don't more advisors use a trust company instead of an RIA? The main reason is a lack of capital. The capital reserve requirement to start a non-depository bank/trust company is a seven-figure amount that one-advisor shop RIAs don't have at start-up. However, I suspect this structure will become more common over time.

More information here:

How to Get Real Financial Advice If You Need It

Delegator, Validator, or DIYer? Take This Quiz to Find Out What You Are

 

We're Doing It

After 15 years of thinking and talking about this, we're taking the first steps toward actually doing it. WCI is partnering with others to build this ideal financial planning firm, and we will be rolling it out over the next year. Now, I'm not going to be your personal financial advisor, but WCI will maintain majority ownership and control to ensure the vision outlined above is carried out. We're excited to do this, even if it makes us a little nervous. We know some of you will disagree with this choice or judge it as “selling out.” We also know we're putting our brand and reputation at stake in a historically problematic industry. However, we think the opportunity to serve WCIers better and potentially change the entire industry is worth that risk. At the end of the day, we just want to do what is right and best for this community we care about, and this is our next big effort to live up to that goal.

We're going to need a lot of help to serve as many people as we hope to serve. If you're a financial planner who's ready to be paid fairly to do planning instead of prospecting, you can get more info here. We would love to hear from you.

While we're not yet accepting clients, if you'd like to be kept up to date on our progress, you can sign up for a no-commitment interest list here.

You'll obviously be hearing more about this firm as time goes on, but we are excited to better serve white coat investors in the future.