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.
Alpha For Financial Life Planners
August 4, 2014
« Previous Article
| Next Article »
Login in order to post a comment
Comments
-
I also want to point out that the DALBAR study does NOT differentiate between kinds of investors (individual vs. advisors vs. institutional, etc.). Data is not kept the way everyone seems to think it is and so that kind of differentiation is impossible. The DALBAR study simply looks at asset flows into and out of mutual funds, creates returns based on when assets are and aren’t invested, and then compares those returns with the underlying returns of the mutual funds themselves (basically a dollar-weighted return vs. time-weighted return analysis). Morningstar does the same thing with its Investor Return vs. investment return. It’s certainly telling, but what it’s telling us is that individuals AND professionals all are horrible at timing when to get in and out of mutual funds. The scary thing is that since the vast majority of assets are controlled by professional investors, what the study really says is that the professionals in charge of the majority of wealth in the world make really bad decisions on a very regular basis! Sorry, Roy, I wish I had nicer things to say about your post.
-
I agree that planners provide services that are difficult if not impossible to measure in a way that could ever justify a percent-of-assets-under-management fee structure, but isn't that the exact reason why charging a % of AUM makes no sense at all for planning services? Why should a client pay a % of assets for one-off pieces of advice like whether to buy or lease a car, refinance their mortgage, or fund an endowment for their alma mater? No, those services should be paid for via an hourly rate, and once those services are rendered and the fee charged, that's it…go find more advice-giving business. Ongoing fees for infrequent services and advice are great for the planner, but totally unfair for the client. Why clients don't complain is a function of an informational disadvantage on their part rather than satisfaction with the relationship. And the benefit for planners of that compensation arrangement is exactly why planners (and accountants, and lawyers, etc.) have gotten into the asset management business over the years. It’s high time someone called them out on it. Stick to an hourly rate and justify it however you think is appropriate. A %-of-AUM fee should only be charged for portfolio management services, and those services are most definitely measurable relative to a mutually agreed upon benchmark. That benchmark should reflect the level of risk to which the advisor will subject the portfolio, and measurement against that benchmark should include all fees and costs of management. If over time the advisor can offer returns near that benchmark, the client should be perfectly happy. As Roy points out, one doesn't need to beat the benchmark necessarily, since the advisor has at least saved the client the trouble of investing on his/her own and that's worth something. But measurement is crucial so that if one falls noticeably short of the benchmark, clients should inquire as to why and consider having someone else manage the portfolio or do it themselves. This notion that portfolio management services can’t or shouldn't be measured against a benchmark is ridiculous…and is the argument I would expect from someone who has a reason to hide from performance measurement. And while I’m criticizing, let me also point out that planners tend to include accounting and estate planning advice as services they provide (and charge that AUM fee on) when their disclosure materials all say they are not accountants or lawyers and therefore cannot provide such advice. Why is this, and why do their clients continue to pay a % of AUM for “advice†that is indirectly related to the AUM and cannot even be offered?! ? What usually happens is the planner “quarterbacks†such advice and refers their clients to accountants and estate attorneys to whom the client then pays hourly or service-related fees. While it might be appropriate for a planner to charge a referral fee in such instances (I don’t approve of the referral fee thing, either, by the way), but including accounting and estate planning services as part of what the services included in a % of AUM fee is highly dishonest and should be illegal. Leave accounting advice to CPAs and legal advice to the lawyers. It’s their careers on the line, not the planner’s, so they should receive the fruits of their labors rather than some “quarterback.†Sorry, Roy, I just don’t think you could be more wrong.
-
Bravo - well thought out article. Thank you for the perspective on alpha. Right on!