Nick Murray recently wrote about the fear some advisors have about the fees they charge, “If you are afraid to stand up proudly for the enormous gap between the great value you provide and the little you charge, you deserve to get everything you get.” It has always amazed me that many financial planners agonize over the fees they charge, while their clients, by and large, do not.

Nick got me to thinking: Why is that? While I have no way of knowing, I feel sure that we would certainly know it if our clients did not perceive value in the fees they pay us. So, as Nick suggests, perhaps we need to focus on the value we provide rather than the fees we charge. And, for financial life planners, that value is significantly greater than what we are paid to deliver it. And I do not mean providing superior returns or beating some index, which can be measured. No, I am talking about the immense value financial life planners bring to their client relationships that cannot be quantified with numbers. It is this value that results in client retention rates in the high 90s.

It was about 10 years ago that I attended a memorable FPA retreat in Missouri and was privileged to witness one of the most motivating sessions I have ever seen. Videotaped interviews of four clients of financial planners were presented. They each spoke of how important their relationship was with their planners and what it had meant to them. They recounted how the quality of their lives had improved. Some of the phrases and words they used to describe their experiences were “peace of mind,” “trust,” “friendship,” “caring,” “concern for our needs,” “availability” and “competence.”

One could not help but notice two things all of these clients had in common: They treasured the relationships they had with their planners and not one of them mentioned investments. So why should we, as financial planners, attempt to justify the fees we pay by the returns we provide? Are there potential clients out there who want to judge us solely on our ability to beat some arbitrary index? Of course. So what do we do with these prospects?

My suggestion: Do not convert them into clients. There are many more people who will appreciate the real value we provide, and the clients who concentrate on returns will most likely be unhappy at some point and attempt to find that elusive advisor who is able to deliver on those expectations. We do not need to play that game. To say people hire us mainly for superior investment results diminishes what we really do for our clients.
 

However, that certainly is not meant to imply that we do not provide value for our clients when we manage their portfolios. On the contrary, that value is enormous. It’s just that it cannot be accurately measured. Most of us are familiar with Dalbar. In the 2014 update to the company’s Quantitative Analysis of Investor Behavior report, Dalbar conclusively demonstrates that average investors continue to chase investment returns to the detriment of their pocket books. Most likely motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns.

Not surprisingly, most investors are unable to time the market and they may be left with equity fund returns that are lower than inflation. Since the inception of Dalbar’s report in 1984, the average equity investor earned a paltry 3.69% annually, while inflation was 2.8% and the S&P 500 index earned 11.11% annually for 29 years (1984-2013). And of course, this huge difference between investors’ returns and market returns is most likely due to individual behavior, particularly during down markets.

So it is not necessary for financial advisors to tell clients that beating the market is their primary value. Dalbar has demonstrated that, when left on their own, average investors got returns that were more than 8.3% lower than the market! As advisors, you do not need to beat the S&P to deliver value to your clients. You provide discipline. You see to it that they don’t overreact to market swings. You stop them from doing the things that average investors do that cause them to get inferior returns. (How many advisors protected their clients from overreacting during the 2008-2009 downturn?)

Yet there are far too many planners who diminish the importance of this discipline and judge themselves on their ability to beat some index. They fear clients won’t pay their fees if they don’t. They feel they must provide “alpha,” which they define as the return over some arbitrary benchmark that has nothing to do with their clients’ goals. And that alpha must be higher than their fees, or their clients will fire them.

By trying to justify the fees they charge by using some quantitative measurement, they may be setting themselves up for failure. We all know the technical definition of alpha, but financial life planners need to define it differently for their clients.

First, if we look at what we do quantitatively, the return we provide should be better on a risk-adjusted basis than what the clients’ would have gotten if left on their own—not a return above some index. However, that is very difficult to measure because we have no way of knowing what their results would have been had they not engaged our services. But Dalbar has certainly provided us with a clue of how well the average do-it-yourself investor does. In fact, if the return of the equity portion of the portfolios you managed for the period studied by Dalbar were 2% below the S&P, you still would have benefited the average investor by over 6% per year. We know of no advisor who is charging 6%!

However, if we stray from the technical definition of alpha and define it as “value we provide for our clients,” then the term takes on a much broader meaning and defines who we are as financial life planners and what we do for our clients. Alpha, if we insist on a quantitative measure, could be reaching or exceeding the client’s financial goals.
 

If a client needs to obtain a return of 6% to reach every financial goal she has in life and your portfolio returns 6.5%, have you not provided alpha? How about the clients who use their time in pursuits that they value and enjoy, rather than agonizing about their portfolio? Is that not alpha? Is the coordination of clients’ estate plans in a way that supports their values alpha? Is being tax efficient alpha? How about helping them with their business plans? Isn’t that alpha? Or giving them advice on whether to buy or lease a car, helping them find or refinance a mortgage, helping them discover their core values and goals or helping them in their charitable endeavors? Or doing all the other things that financial life planners do for their clients that are too numerous to list here? Or perhaps the most important of all—giving them peace of mind?

Are these not all alpha?

Can I put a numerical value on all of the services we offer? Of course not. But I do know that financial life planners who perform all of these non-investment services for their clients do not need to be in the fee justification business by claiming to deliver what they most likely cannot.

One of our clients managed his own portfolio for years (and did a good job), but hired us so he could devote more time to his practice and family. During the bear market of 2008-2009, he called to tell us how happy he was that we were the ones that needed to make the tough decisions about his investments and not him. That was his alpha. We showed another client he had enough money to establish a scholarship endowment for his alma mater. For yet another client, our alpha was helping her set up an ESOP for her company, and for other clients it has been converting traditional IRAs to Roth IRAs when appropriate. The list can go on and on, and you will have your own examples. The next time you are concerned that your fees may be too high, I suggest that you review the list of all of the services and value you provide for your clients. 

Roy Diliberto is the chairman and founder of RTD Financial Advisors Inc. in Philadelphia.