Fees are finally a hot-button issue in the financial world. As they should be! For too long, fees were ignored and accepted as just the “cost of doing business” with an investment advisor, or worse, with a broker, an insurance “guy” or the CPA down the street selling mutual funds. Thankfully, it’s now becoming painfully obvious to many investors that high fees are, without a shred of doubt, cancerous to investment returns and the individual investor.
Ask yourself: How can any self-respecting advisor feel good about being an advocate for low fees on investment funds, but on the other hand charge clients the highest amount they can get away with?
I started this advisory with a low-fee structure. I was laughed at by numerous consultants and industry “experts” for charging half of what was considered the Gold Standard 1% rate. Now I’m doubling down on the idea that I should win only when clients win – and also on the Amazon.com philosophy of being relentless in finding ways to charge clients the least amount viable instead of the most.
Instead of a plain 0.50% per year fee on assets under advisement, broken up quarterly with no ceiling, I’m now setting a cap on the quarterly fee at $900. This results in a maximum yearly fee for clients at $3,600 per year. It ends up looking a whole lot like a $300 per month subscription for clients at or above $720,000 in assets under advisement, and that’s by design. Clients with larger portfolios shouldn’t subsidize clients with smaller portfolios.
Also, I now have a minimum fee of $297 per quarter. This number is no mistake and settled there for a reason: it’s intended to replicate a $99 per month charge. A big problem for clients is when they have no (or low) assets it’s hard to get help because advisors don’t see the value if they can’t draw from a large portfolio. My thought is that most people, regardless of account size, can manage to pay the equivalent of $99 per month if they’re serious about getting investment advice. I don’t ever want to turn someone away because they don’t have a large portfolio.
Many advisors are adopting either (1) a monthly subscription model with a large upfront fee for all clients or (2) a flat yearly fee model. Both options give the advisor zero financial incentive to grow client portfolios at any asset level (besides to keep clients just happy enough to not fire them).
For instance, one advisor is gaining publicity with a $4500 yearly fee per relationship. While a flat fee across the board is much better than many of the alternatives, I personally don’t want to be incentivized to only get clients to “sign on the bottom line” — I also want to win when they win, and share in the loss if account values go down — because I believe in the notion that financial incentives are important. This subtle, but important update to my fee model confirms my commitment to help turn smaller portfolios into larger portfolios.
Here’s an interactive chart to show the different estimates of yearly fees based on the models I’ve mentioned:
As you can see above, it is a very painful situation to hire a flat-fee advisor as a client with little or no assets, just as it’s VERY expensive to hire an advisor who charges 1% with no ceiling as a client with a large portfolio.
It would give me a hefty amount of personal satisfaction to again be lambasted for “leaving too much money on the table” by charging clients as little as possible. This is a bit of a twisted sounding dream, true, but would be an absolute confirmation of my desire to take the Amazon.com approach to heart.
Channeling the spirit of Samuel L Jackson’s character in “Pulp Fiction,” I challenge the so-called experts once more:
SAY “YOUR FEES ARE TOO LOW” AGAIN. I DARE YOU…I DOUBLE DARE YOU, (redacted)!
Bring it on, “experts.”