Like what you're reading? Buy the book on Amazon!
Frequently, I see news articles that talk about the upcoming doctor shortage. With all the baby boomers retiring, apparently many more primary care and other types of doctors are going to be needed. Given the difference in pay between specialists and primary care physicians, apparently far too many medical students choose to specialize. The problem can be particularly acute in rural areas. Yet I never see a news article that says there are too few financial advisers. This ought to surprise you, since the need for financial advisers has never been higher. Pensions are going the way of the dodo and the majority of American workers is now responsible for their own retirement. People are wealthier on average than in past generations. Financial markets and the tools available to invest in them are getting more and more complex each year. The population also continues to grow. Yet, apparently, we still have far too many financial advisers. Let's look at how we know this:
Exhibit 1: Have you ever seen a financial adviser with a closed practice? Neither have I. Yet doctors close their practice all the time, especially to lower-paying clients like those with medicare or medicaid. How many clients could a financial adviser handle? Well, let's say he needs to spend a half hour with them once a quarter. He may need to spend 5 hours a week doing research that benefits all the clients. Let's say he works for 40 hours a week for 48 weeks a year. In any given quarter, he has 840 appointments to meet with clients. So a “full practice” would be 840 clients. Most financial advisers would be very happy to have 3% of that. Even if he spent 2 hours per client per quarter, he could still handle 205 clients. Ask your adviser how many clients he has that he meets with at least once a quarter. The answer may surprise you.
Exhibit 2: The barriers to entry to become a financial adviser are way too low. The actual requirements can be completed with minimal education, sometimes as little as week or two of studying, and less than a few hundred dollars. In fact, most financial firms prefer to hire someone with lots of sales experience and then train them themselves. Sure, they get enough education to pass the minimal tests, but most of the training is, again, in sales.
Exhibit 3: How much should a financial adviser make? Given that the educational requirements are so low, I think there would be plenty of people lining up at the door to do it for $60,000 a year. How many clients does an adviser need to have to generate $60,000 a year in fees? Let's say his average client has $500,000 and they pay him 1% of their assets each year. Just for fun, let's assume he doesn't get any loads or commissions. 1% of $500,000 is $5000. So to make $60,000, he needs just 12 clients. 12 clients! He could spend an entire week per quarter with a client if he only had 12! To be fair, there would probably be some overhead, so add on a few more clients. But still, that's ridiculous. And that assumes no commissions/loads. Since 2 hours per quarter x 12 clients is only 24 hours, how does he spend the rest of his time? One word: Marketing. Since each additional client is so profitable, there is a huge incentive to get more. But given the income possible for just a few clients, the job attracts competitors like pheromones. Let's say an adviser was quite successful, and actually built his practice to that 205 client level. How much would that be worth at 1% a year for an average portfolio of $500,000? $1,025,000 annual salary. Sound pretty good to you? Me too. Especially for a bachelor's degree and a couple of weeks of on-the-job training. And again, this is assuming no loads or commissions.
Exhibit 4: What percentage of your time do you spend marketing your practice? Perhaps your first couple of years of practice you'll spend 2 or 3% a year. After that? For most doctors the answer is nothing. Medical care is a product that is bought, not sold. Not so for financial advisers. MOST of their time is spent marketing, even after years in the industry. Even the good ones have to spend lots of time marketing since their practices aren't full because they have to compete against all the scumbags.
Exhibit 5: How much SHOULD a financial adviser charge? Well, if they spend 2 hours a quarter on your account, that's 8 hours a year. Even at $250 an hour (more than many physicians make after 10-15 years of training) that's only $2000 a year. On a $500,000 portfolio, that's 0.4% a year. You don't pay your lawn guy, your doctor, or your lawyer as a percentage of assets. It doesn't take any more time or effort to manage a $1 Million portfolio vs a $100,000 portfolio. Why would it cost 10 times as much? If an advisor had just 100 clients, and made $2000 a year off each of them, he would make as much as the average doctor. Seems like a plenty fair wage to me. If you're paying more than $2000 a year for financial advice, you might want to think about negotiating that down. Many of your colleagues are unknowingly paying $10-20,000 a year. (1% of a $1-2 Million portfolio.) Whose 401K are you funding?
Conclusion: There are way too many financial advisers. Unfortunately, the vast majority of them are poorly trained, have little experience (at least in financial subjects other than sales), and spend most of their time seeking out new clients rather than servicing existing ones. I'd like to see the barriers to entry and educational requirements raised. I think that would decrease the number of used car salesmen in the business. And don't even ask what advisers think about doctors.
What do you think? Are there too many financial advisors? Too few? Are there barriers to entry too high, too low, or just right? Comment below!
We must be on the same wave length. See my blog from 6-16-11:
http://awmideas.blogspot.com/2011/06/what-is-hourly-rate-you-are-paying-your.html
Yes we are. I enjoyed your post. Thanks!
You might like these advisors:
1) http://www.merceradvisors.com/
2) http://www.evansonasset.com/
I’ve been aware of (and approve of) Evanson for a long time. I don’t know Mercer, but they seem to follow an evidence-based investment approach. It always bugs me a little when they don’t put their fees right out there in bold print on the website though. It seems if you can’t find them, they’re usually too high.
These are valid points and I commend you on your efforts to educate your readers. In the interest of full disclosure, I am a financial advisor. I hope you will continue reading despite that admission. Below are my responses to your exhibits along with some facts to support your arguments.
1. Our figure is a maximum of 65 clients per wealth management relationship. You are right to point out that most advisors do not have a ceiling on their client base. Many advisors have hundreds of clients which is unimaginable to me. At some point the firm/advisor will inevitably begin to sacrifice service quality.
2. Anyone reading this could become a “financial advisor” in less than a month. There is only one painless exam to take, the series 65. You should encourage your readers to seek out advisors who hold the CFP and CFA credentials. They are the most respected credentials for financial planning and investment management, respectively. I have both (along with an MBA and an undergrad finance degree from top tier universities). Unfortunately, less then 1% of financial advisors are in that group with me. The CFA is the most prestigious credential in finance. Charterholders must pass 3, 6 hour exams (graduate level of difficulty). The CFP exam (bachelor’s level of difficulty) is 10 hours. At the very least, a CFA, CFP has passed 28 hours of examinations. In my view, it is a reasonable hurdle for someone to overcome before asking you to pay them $10k+ annually. These credentials are not an indicator of skill or aptitude but rather a proxy for commitment.
3. Many of my CFA and MBA friends work with mutual/hedge funds or ultra high net worth clients ($10m + in investable assets). These jobs pay well into the 6 figures and you don’t have to deal with the lack of education of the general public. I enjoy helping people and the bonds I form with my clients and I expect to ultimately make what I could be making elsewhere. But, the road to get there is more arduous and entails more risk which is why most of my peers haven’t chosen this path. In other words, those who have been through a more rigorous screening process aren’t working directly with your readers.
4. I agree though there are exceptions.
5. I would encourage your readers to ask prospective advisors for performance history vs. a passive investable benchmark. If they cannot produce this information, they either do not have a sophisticated investment approach or their performance is lacking.
Good comment. Lots of insight there. In other posts you’ll note I do recommend a CFA or a CFP or a ChFC as a minimum level of education.
Hopefully when we quit paying ridiculous hedge fund and mutual fund fees more of your associates will be around to give us lowly middle class folks quality advice and run the commissioned salesmen out of business.
I apologize if this a revival of a long ago post. But after reading it I have some serious qualms with the analysis included inside. I do not mean to discourage having high standards for professionals who manage others’ money, but I think this article is arguing under a fundamental misunderstanding of marketplace dynamics. If I create barriers to entry, and make it more difficult for their to be new financial advisors, this will not keep the current fees static. Those Financial Advisors who qualify under the arbitrarily more difficult system you suggest will obtain an immense amount more pay since their services are now incredibly rarer. Its ironic that you would choose the medical profession as the benchmark by which professional – client relationships should be judged given that it is a widely known fact that the healthcare system (at least in America) is incredibly inefficient the cost of medical school and physician credentials are mind-boggling. Those high costs are the direct cause of substantial suffering and explain the lack of supply to meet demand. Bottom line is this, if you decrease the supply of a good that has demand, then you increase the price. It does not matter that the top tier Financial Advisor could choose to charge less and still make more under your new system. They will almost universally increase their fees since they have a captive market now. By removing competition you have increased the power of those remaining advisors at the expense of the general public. When one party in a negotiation is in a position of power, the outcome is obvious. Though I disagree heavily with the assertions in this post I admit that perhaps we are arguing from different viewpoints of what is preferable rather than our understanding is the likely outcome of increasing standards for FAs. If you truly just wanted to increase the average quality regardless of the increase in cost, then perhaps some increases in difficulty to enter that career would be appropriate.
Thank you for your excellent comment. There is a need to balance assuring quality of a practitioner with making the practitioner actually available financially. But imagine a world where there were 10 times as many doctors, and you had no way to tell which ones were good or bad until they’d taken your money and ruined your health. That’s kind of what someone looking to hire a financial advisor encounters. The vast majority are simply salesmen. As many qualms as I have with the licensing and board certification system currently in place for docs (especially the maintenance of certification hoops), I find the alternative pretty scary.
Imagine- a board certified financial planner licensed by his state- a requisite amount of education, supervised experience, and a fiduciary duty. That doesn’t sound so bad. Will the price go up? Perhaps. But there is no price low enough for bad advice.
I completely disagree with your math. You say an advisor spends 2 hours per quarter with a client that GROSSES them $5,000 per year and that 12 clients generates $60,000 per year. We can go through the details of all the expenses involved such but let’s start small – one assistant at $40,000 minimum, office rent at $1,000 mo-$12,000 year minimum (that’s only 2 people-advisor and support person), at a minimum about $4,000 year in software, your forgot licensing and fees to keep you credentials currently, continuing education requirements, errors and E & O insurance, the monthly fees you pay your broker dealer and the list goes on. And how much time do you think an advisor spends on research, staying current on tax and Roth conversion analysis, pension maximization, and the list goes on with all the other services included typically included in that fee. I’d love to find the client who only wants to take 2 hours per quarter of “face” time with me and I can stick him in some no-load or better yet, index (low-cost) ETPs and just let it ride, because if I’m only spending 2 hours per quarter or 8 hours per year on that client, I won’t have to worry about rebalancing their account because then I’d be spending over the 8 hours they’re allowed. I don’t believe you know all that’s involved in the financial planning practice – at least those who are really good and include full-service, comprehensive planning versus the product hawkers.
Wow! Blast from the past. I haven’t seen this post in 3 years and it hasn’t had a comment in a year. That means, of course, that in order to provide any kind of intelligent reply to your comment, I have to reread what I wrote and see what you disagree with. As near as I can tell, you’re saying you need to spend more than 8 hours a year on a client and that you have overhead costs like any other business.
Let’s just assume you’re right. Let’s assume it takes 20 hours a year to service a client properly. Let’s also assume a 50% overhead cost. Do you agree that’s reasonable? Okay. Again, let’s say you’re willing to take clients at 1% a year, and your average client invests half a million with you. How many do you need to have an income equal to that of the average American household (around $50K a year?) Let’s assume you want some vacation, so you only work 48 weeks a year. 48 weeks by 40 hours (let’s assume you’re also not willing to work more than bankers hours.) That’s 96 clients. If each client is paying a very reasonable $5K, that’s a gross business income of $480K. You get half of that, or $240K. That’s an awfully nice income considering the very low educational barrier to entry. But let’s assume, for some reason, that all your overhead is fixed (ridiculous, I know, but go with it.) So you have $240K in overhead each year. In order to get your $50K income, you need $290K in gross business income, or 58 clients. I figure you can do that while taking 5 months off every year.
Anyway you slice it, I think the same conclusions hold. There are too many financial advisors because the barriers to entry are too low.
Most of what you outlined could be said for Physicians. But that also would be ‘painting with a broad brush. I am a Financial Advisor with over 20 years experience, 10 years prior as an investment analyst for a Venture Capital firm. There’s not many of “ME” out there. I’ll put my “Social Trend and Vectoring Analysis” up against some CFP any day. I can expound and brag a bit here because I gave only my first name so what motive do I have to embellish? Like in all things there are good and bad practitioners of various services. Trust is key. If you were able to find my firm you’d see that I am the only officer/Advisor. I have all of the safeguards as any firm, but without the huge overhead that goes to ornately impress the naive. All that lavishness didn’t help all the firms that had to be bailed out in 2008. But most of you Docs still kept your accounts there. Brilliant. I do not have minimum balance requirements. My fees are HALF of the standard 1%. Before I opened my own firm after reaching tenure, the firms I slaved at prevented me from lowering my fees.
I spend a lot of time doing Pro-Bono work for the various Utah Teacher’s Unions. You’d be surprised at how much money I saved MANY teachers after the 2008 crash on my “life change” advice alone.
The point to all of this is pure venting. And if I may, tell your gate keepers to ease up a bit, and to realize that if you shoot all of the sales people, MARSHALL LAW will be announced a week later, and all Doctors will be paid in Chickens and bushels of grains…which obviously means that rude gatekeeper will be paid in Chickens, eggs and bushels of grain too.
Thanks
I wish everyone shared your fee structure.
Frankly, I am glad they don’t share my fee structure. My fees are fine where they are, and there is no way that the big firms with the huge over head can reduce to beat my fees. So they are left with hoping their clients don’t find me and compare experience, accolades, and fees. But I was given advice by a marketing firm that by lowering my fees, I was diminishing my perceived value. THERE IT IS. Psychological misQues that lead us on stupid paths. Why isn’t a firm with more experience in ANALYTICS, and the same safeguards as any other firm, without pressure to sell sell sell, looked at as being LESS ABLE?
It sure would be nice, if Doctors would WISE UP, and seek out true wisdom and ability. Bigger is not better in this schema.
AND let’s call attention to another stupid element. What good is an MBA in Investment or portfolio management? I’ve started and sold a few companies with products I patented, and sourced over seas. I’ve actually done everything covered in the University of Utah MBA curriculum, but only a micro fraction of that past experience is relevant to my Investment Analysis experience.
It’s like seeking out a Cardiologist with a Welding Certification.
Yes, it’s a screwy world, isn’t it?