Let’s talk advisor fees. They are too high. It’s the last bastion of gluttony in the investment industry and there is no reason for it.
People didn’t blink at a 1.0 percent advisor fee (or more) during the 1990s when a roaring bull market lifted stocks by 17 percent annually. Trying to discuss fees was a lost cause. The conversation routinely led to comments like this, “I don’t care how much my advisor makes as long as I’m making money.”
That was then, this is now.
Stocks are no longer returning double digits and interest rates are at a record low. Investors are looking for ways to increase returns. Cutting back on advisor fees is a good start.
Investing costs have come down universally over the past two decades, except for advisor fees. Index fund fees are much lower, commission costs are only a few dollars per trade, and bid/ask spreads have been decimalized and squeezed. Yet, despite these cost saving advances across the industry, advisors fees remained at the same stubbornly high level as they were years ago. It’s as though the advisor industry has made no gains in productivity over the past 20 years.
Has technology overlooked the advisor business? No, the software used by advisors has made portfolio management infinitely easier. It used to take me several days to check the allocation on 50 portfolios; today it takes a portfolio management team about 5 minutes to check 1,000 portfolios. Report generation used to be a labor-intensive exercise; now it’s done by pushing a few buttons. Most communication with clients used to be by phone; now it’s done by email. Everything about our advisor business happens faster and with increased accuracy.
The total time it takes to manage a client relationship has been cut by two-thirds over the past decade, yet the fee charged to clients has not reflected this productivity gain. According to Charles Schwab Institutional, the average fee for managing a $1 million portfolio was 1.0 percent per year in 2010. That’s the same average fee charged in the 1990s. Where are all the productivity gains going? They’re going to the bottom line of the advisors.
These fat profit margins are attracting the attention of private equity groups. The private equity firms are interested in rolling-up a few dozen of these highly profitable advisors into a larger company. They’ll pay cash and stock for an advisor’s assets, slap on a layer of management, and eventually go public through either an initial public offering of stock or sale to a Goliath full-service financial firm.
We get calls all the time from private equity firms. But they don’t like our story. I take pride in saying our company doesn’t fit what they’re looking for because we only charge a 0.25 percent fee* for portfolio management services, and have been since 1999. This makes us far less profitable than our competitors.
After getting over the shock, the person who contacts us asks why we’re not charging the industry standard 1.0 percent fee. “Why not charge what the market will bear?” they say. I say that we’re not interested in charging what the market will bear. We’re all about charging what’s fair.
I believe that investors who are paying 1.0 percent or more for portfolio management services do so for one of two reasons. First, the fee is being used to pay for other services, such as tax preparation; second, investors don’t know what they should be paying for portfolio management. The second is more typical.
In the first case, where the fee covers other services, it has always been my contention that portfolio management fees should go to pay for portfolio management costs. All other services should be paid for with a separate fee. That’s called full disclosure. In the case of fee ignorance, it’s just sad when an investor thinks they should be paying so much. They certainly will not hear otherwise from their advisor.
I find it ironic that an advisor in both cases will say their firm is a fiduciary, meaning they are bound to act in the best interest of clients at all times. Perhaps there should be a clause in the advisor contract that states, “Fiduciary duty is not applicable to advisor fees.”
I’m particularly critical of advisors who promote the virtues of low-cost investing using index funds and ETFs, only to charge a high fee for managing a portfolio in these products. These hypocrites routinely preach “low fees matter” while conveniently leaving their own high fee out of the sermon.
I’ve been writing about advisor fee gluttony for many years and know how John Bogle must have felt in his early years at Vanguard. His bashing of mutual fund fees and poor fund governance drew high praise from the investing public and sharp criticism from the industry. Some people called his low-cost index fund idea Bogle’s Folly. One competing company even created a poster with Uncle Sam calling it Un-American.
Every article I write on this subject comes at a price to my standing in the advisor industry. I’ve been booted off advisor-only websites, locked out of advisor-only discussion groups and intentionally left out of certain industry conferences. I’ve been told by several advisors that the subject of advisor fees is best left alone, and that I’m unethical for taking on this challenge.
Advisors are all for low fees — as long they aren’t their own.
Investors know what’s good for them. Over time, money flows to value. Vanguard’s $2 trillion in assets proves it. Advisors who adopt fair-fee policies will see increased traffic in the future and those who continue to practice gluttony will lose assets. The truth about fees shall be known, and fair-fee advisors shall prevail.
*A total relationship value below $1 million is subject to a $625 minimum quarterly fee in lieu of the .25% annual management fee.
