Executive Summary
For the past several decades, the prices that consumers pay for financial products have been trending lower and lower. From the rise of discount brokerage in the 80s, to no-load mutual funds platforms in the 90s, online brokerage in the “aughts”, and robo-advisors in the 2010s, the cost of investing has decreased steadily and dramatically. Accordingly, a recurring concern over the past decade has been whether the “fee compression” in financial products will eventually spread to financial advice as well. Instead, though, the opposite has been true, as our own Kitces Research shows that there has actually been fee expansion when it comes to financial advice, as the typical price that advisors charge for standalone financial plans, retainers, and hourly rates has been on the rise (and even AUM fees have remained remarkably stable!). Which suggests that, as the industry has become more focused on the advice side of the equation (and less on product sales), advisors have had to up their game… and in practice really are delivering far more value to their clients than they ever have… to the point that they’re even able to charge more for it!
However, as the advisory world transitions fully to advice fees and the debate between commissions versus fees begins to fade, a new sort of industry conflict is rising to take its place: where advisors who charge fees are criticizing each other for whatever fee model they’ve chosen to utilize within their practices, and the suggestion that their particular fee model is superior to all the others. Which raises the question: is the debate about the “best” advice fee model another version of consumer education (akin to teaching consumers about the difference between fees versus commissions), or are advisors charging fees becoming too focused on differentiating on price (or pricing model) instead of focusing on the range of value that a range of advice fee models can support?
In our 56th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the emerging new advisor fee debate, why advisors may be missing the mark on the core issue at play, and how advisors could reframe their discussion in order to help move the profession (and their own practices) forward.
As a starting point, it’s important to remember that in an industry with a lot of compensation excesses, it has been a tried-and-true tactic for financial advisors to build their businesses over the years by pointing out that their costs are lower (making it more feasible to deliver better performance) than their competition. Yet at the same time, it’s important to remember that there’s a difference between advisors who charge a lot for very little service, and advisors who charge a lot for a lot of service (that not all clients may want to buy and pay for… but some do). In other words, while there are certainly advisors whose rates are “high” (in absolute terms), the central debate shouldn’t be around the fee itself (or what it’s based on), but rather the value that a client is actually getting for the fees they pay. Or stated more simply, the issue isn’t whether a certain fee (or fee model) is good or bad, it’s whether the fee itself is justified for the value it provides to the particular type of clients being served.
From a client-facing perspective, meanwhile, advisors might consider focusing on all the services (and value) they provide when meeting with prospective clients, rather than highlighting the fees that other advisors may be charging. Because, at the end of the day, when advisors ask good questions and emphasize the positive effect that they have on their clients' lives, prospective clients will be able to connect the dots themselves and understand if the service that they’re getting (or not) from their current advisor is worth the fees they’re paying.
Ultimately, the key point is that advisors who win business on price run the risk of eventually losing business on price (and/or simply attracting the most price-sensitive clientele). Which means for advisors focused on long-term relationships, making clear the real value of financial advice (and what that looks like on an ongoing basis) turns the focus away from why a prospective client may or may not be paying too much, and towards their pain points and the issues that they need help with. Because it’s the emphasis on the positive work that advisors do, and the outcomes they facilitate for their clients, that will push the profession (and individual advisory firms) forward.
Authors:
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
Kitces & Carl Podcast Transcript
Michael: Greetings, Carl.
Carl: Hello, Michael. How are you?
Michael: I'm doing well. How are you?
Carl: I'm good, good. We moved from London to back home to Utah, and the couch, the blue couch is going to be away for four months. So I replaced it with a blue hoodie just to make you feel better.
Michael: I appreciate the blue hoodie. I will admit, I am missing the blue couch, but I am glad to hear it's in transit. I wish you had picked a faster boat that can get it from London faster than four months, but you have saved the couch. It's on its way. I really can't ask more than that.
Carl: Pretty darn funny that people actually asked about that. When I had announced that I moved, people on Twitter actually said, "I hope the blue couch is coming because that would make Michael very sad." And I was like, "Yeah, I'm excited about making Michael a little sad. I want to throw him off his game a little bit." It's like the advisor version of trash talking.
Michael: It wouldn't help. All that would happen is you would show up without the blue couch and then I would go and have to buy you a blue couch. And your wife is an interior designer and I am not, so I guarantee you, she will hate whatever blue couch I send because I have no skill or competency in this whatsoever. For the sake of your marriage, don't make me pick a fight with your wife over the blue couch. Let's just stick with the beautiful blue couch she already picked and we'll get it back on in approximately four months.
Carl: Yeah, we don't want to beat this to death, but that blue couch has gone from New Zealand to London. I promise you it is coming to Utah.
Michael: Fantastic.
Carl: There's no way.
Fee Expansion (Not Compression) In The Financial Advice Industry [02:37]
Michael: As we kick off the discussion today, I want to actually talk a little bit about fees, compensation, advisors and what we charge. Because we had put out a study around this recently. So we did some Kitces Research on how advisors do planning and what they charge. Last year, we've been publishing some sort of deep dives into some of the data and analysis over the past few months, had put out an article about this a couple of weeks ago really diving into some of the “what advisors are charging.” The data to me is fascinating, not just because I'm a nerd that finds pretty much any data fascinating, but the dominant conversation out there continues to be “fee compression, fee compression, fee compression.” And then, we went and ran the actual data of what advisors are charging, and it is literally the opposite. Not only was there not fee compression, we're seeing flat out fee expansion.
Average fee for a standalone financial plan, up 12% on average from $2,200 to $2,500. Median retainer fee up 25% from $3,200 to $4,000 a year. Median hourly fee that advisors are charging, up from $200 to $250. Even AUM fees were mostly flat, although notably not down, not compressing. But we actually saw even AUM fees rising slightly, particularly for the most affluent clients, where normally we talk the most about the fee compression. Even AUM fees are creeping higher at the high end of the scale.
And I think, to me, really what's going on is just, we put financial advisor on our business card for 30 years since stock broker became unpopular in the 1980s and insurance agent became unpopular in the 1980s. But the truth for a huge swath of the industry was, we were really still in the product sales business, and not only was planning something that we gave away to get the investment or insurance sale, but we weren't even necessarily all that well trained in advice. A single digit percentage of people at any kind of advanced designation, most of us were professional financial advisors with a series exam that you study for in a few weeks and pass and that was it. It's like, we didn't charge much...
Carl: Hey, that took me six months, Michael. What are you..l'm just kidding. I'm with you.
Michael: We didn't build our value proposition around advice. We didn't build our business models around advice. So we didn't charge much for advice and we didn't get much for it because it was all building up to the sale. And now, over the past 10 and 20 years, we're reinventing the whole thing. We're in the advice business, CFP certification is on a massive rise right now. We're at almost 90,000 CFP certificants, 20 years ago it was barely 40,000, even though the total headcount of advisors hasn't moved. It's game on for financial advice. We're building bigger and better value propositions. We're getting really more advice-centric. I think as that happens in mass in the industry, we're getting fee confidence, we're getting better value, which we can see in the aggregate and financial planning fees rising. So all of that's good and wonderful. I'm excited to see financial advising continuing to get its footing and really command pricing power.
The New Debate Around Fee Models And What Advisors Charge [06:08]
Michael: But one of the things that cropped up from it, and I feel like it's sort of this dark underbelly of our world and these evolving models of fees is, we're really starting to take shots at each other sometimes for our fees. “This advisor charge is too much, this advisor charge is too much. This AUM model is bad because you should charge hourly instead.” It's like, “well, let's calculate your hourly rates. Oh, that's actually kind of insane. Yeah, but AUM is bad.” Or sometimes some advisors work with very high-end clients and we did some analysis on this. For the research that we did, the average AUM advisor, if you just take how much time they spend on all their financial planning stuff across all the clients they do it for, and divide it into how much revenue they manage and just imputes the equivalent hourly time, comes in at about $350 an hour. Which is a little higher than the hourly advisors that had a median of $250, but not actually dramatically different. Although, we did see, there's a subset of top-end advisors, the top 10% to 20% of advisors, where if you calculate their AUM fee and turned it into an hourly equivalent for just the fees they get and the amount of time they spent, it comes in at about $900 an hour to as much as $1,500 an hour.
I'm not here to judge it. It is what it is. The math is what the math is. Some people came in and were like, "Yeah, I know lawyers that charge $2,000 an hour, so yup, that's what some high-end advisors charge just like what some high-end lawyers charge." And others came in and were like, "What the blank is going on here? If advisors are charging $1,500 an hour equivalent and they're doing it with an AUM fee, their AUM fee is just masking their rate and they're trying to hide their true pricing."
And just, I'm not actually trying to debate AUM versus hourly and the rest of it. What's cropping up to me though is for the past 20 years, we've had this massive fees versus commissions debate, and a lot of shots getting taken on both sides. And I feel like now that the whole industry is moving to a fee world, we're moving on from debating about fees versus commissions, and now we're just into fighting fees versus other types of fees. And there comes a point of, we'll just call it professional diminishing returns where I have to admit, I am not sure this is the most productive conversation anymore. And even I'm starting to struggle with, yes, I'm all for fee transparency and people should know what they're getting charged. I love that we're getting there, but there a lot of different clients that pay a lot of different fees for a lot of different value propositions, and I'm not quite sure why we're so starting to turn on each other now and challenging each other's fees, instead of turning out to clients and talking more about how financial planning fees are on the rise because advisors are giving so much more value that consumers are literally paying us more and how awesome that is.
Carl: That's a huge problem. Yeah, because I don't know...I'm not, whatever, smart enough to figure out what the average fee is and how this has changed. And I love how we call it, it's got its own word now. It's called Kitces Research, which is my favorite...
Michael: Absolutely.
Carl: That's a particular type of research.
Michael: Absolutely. We have our own certain nerdy style, so...
Carl: Yeah, I love it.
Michael: Kitces Research, capital K, capital R.
Carl: That's right. That's why I think Kitces Research should be done because I don't know what I'm talking about when it comes to that, but I do know a lot about going after each other. And I do know a lot about communication, and I know a lot about the perception of the people out there. I'm pointing out the window. I know how the people out there are perceiving the conversation.
Michael: Meaning what consumers see when we do these industry debates.
Carl: Yeah, yeah. So I don't understand it. I don't know, I've known lots of people over the years that have built successful businesses based on going after other people's models. Like, “Hey, those people are bad, we're good, come to us, those people are bad…” and primarily, the marketing and the messaging was about “those people are bad. Do you know they're ripping you off? We can help you.” And we know people who are doing that now. And by the way, it probably could be a good way to build a business. But it doesn't sound like a fun way to live and I also don't think it's a fun...I do know one thing. If you win a client based on two things, performance and lower fees, I know if you win a client based on performance, you will lose that client based on performance. I also believe if you win a client based on “my fees or lower”, a discussion around fee instead of a discussion around value, “my fees are lower”, I think you lose that client eventually based on the fact that somebody else's fees are lower. So I just don't know that it's...
Michael: In the most literal sense, you are differentiating on price. Not value, not what I offer, not what I do for my clients, not their positive outcomes. You're literally differentiating on price.
Carl: And you're racing to the bottom. And you have to make a decision. Standing on your little moral high horse, telling everybody else how they're terrible. But you had to decide that your hour was worth 27% more than the average attorney in your neighborhood or something. How did you decide? So I think that setting aside, obviously setting aside the need for transparency and that's the only time where we're all clear. That's not something we do. And I know people are doing it. I'm just saying, that's not something this group of people...I always thought too, there's nothing wrong with the Toyota dealership selling you a Toyota, even if it's not the best thing for you. You wouldn't expect the Toyota dealer to tell you to go to Honda. That's the business model. They're there to sell cars. If that's the business model, that's okay as long as the Toyota dealer or the Toyota salesperson didn't come across as somebody who had your best interest in mind. So that's where things get fuzzy quickly in our industry.
And I'll finish here for just a second, we can decide where to go with this, but I think it's been interesting to see this worldwide. Because I've spent so much time in other places, in Australia, in New Zealand. The advisor community in New Zealand isn't very big because New Zealand's not very big, but seeing it in Australia and Southeast Asia, and then particularly in the UK, because UK advisors are sharp. And tend to be relatively witty and don't mind sorta getting in and getting after each other a bit. I've seen it there too. And my perspective is that those fights that take place in public, aren't helping anyone, right? My perspective is... and I've had lots of these questions come from the people, the people say, "What are you guys on about?" It looks just like a disorganized, unprofessional, petty little fight. And this goes with passive versus active. But here we're limiting it to how you charge or what you charge. They look like petty little fights to the people, and I think it makes the industry and the profession look bad. I don't think it helps the client. I don't think it really hurts the person you're going after in the first place, and it might help you build a business but you'll be a sort of a sad person. That's my whole rant on it.
Michael: My challenge, and look, well, I know some of the people who do this because they tweet it or send it at me as well, or they're literally quoting our research and they're like...it is what it is. I'm not here to value judge the numbers. I'm just reporting literally what the numbers came out to be. You can make your own decisions about them. But to be fair, I know some of the people who drive this conversation, and for some of them, it comes from the right place. Which is the phenomenon that we have all seen. There are advisors out there, I'll put "advisors" in air quotes, there are advisors out there who write advisor on their business card. All they have done is sell a product once. They're charging ongoing fees for very little upfront advice, very little ongoing advice. There's not much value happening on an ongoing basis. They're charging the same 1% fee or whatever it is that a lot of other advisors are charging for doing a ton of work and putting a ton of value out there. And I think it is frustrating as heck for any of us to come across, a prospective client who's working with an advisor and find out “that advisor charges what I charge because we've kinda got a fairly stable benchmark fee. That advisor charges what I charge, and I do so much and they do so little. And I'm flat out angry about it.”
Carl: That's a huge dilemma.
Michael: And I get that feeling. I feel that feeling. I think a lot of us have been in the position of feeling that feeling. Some of us are very vocal about it and I do think that's where some of this discussion, it comes from. It's not literally about the fact that some advisors are making the equivalent of $1,000 or $1,500 an hour. It's that there are probably some advisors who are making $1,500 an hour who literally are not doing anything more than the advisor who's charging $200 an hour. And that's aggravating.
Carl: Let's talk about that specifically. So let's pretend like you're one of those people, because we all have been there, right? I can't believe how many times I'd look at the current situation on a new prospect and just be like, "Are you kidding me?" You know? Borderline criminal and...
Michael: “You're paying 1% for that?”
Carl: Yeah, “for a phone call once a year?” So let's assume that you're that, you're in that situation. What choices do you have at that point? And I probably, in fact, I'm sure I'm wrong about this, I'm definitely not in doubt, but I'm sure I'm wrong about it. I just think that we are all better off if we assume that staying...I remember when I got accused of it, when I left a big brokerage firm and the big brokerage firm made phone calls to my clients who were changing and said things like, "He's relocated to the Isle of Man," there were all sorts of weird things. I remember just thinking, okay, I can either get in the mud and go to blows about this in front of the client, or I can...and the solution was I said to the client, "Well, that's one perspective. Do you need me to discuss that in more detail?" And universally, they said, "No. No, that's ridiculous." So I feel like if we're in that spot, my favorite thing to do would just to be, say, “okay, what could I do that would be positive about this?” Well, the thing I could do to be positive was the only reason that client, prospective client is with that advisor, being charged that amount for one-tenth the service level and nowhere near the intellectual capital, it's because they don't know that the other thing exists. Who's fault is it that the client doesn't know that you exist? It's not the advisor over there, it's not their fault. It's not the client's fault. Right? And maybe the better way to say about it is, “who's responsibility is that to change that?” Well, it's ours. So I love just saying, "Okay, how can I use that as motivation to tel more positive stories about the difference we make, so people will go, 'I want that instead of that?'"
Refocusing From A Fee Debate To A Discussion Around Value [18:50]
Michael: So to me, what that comes out to at the end of the day is it's not talking about fees, it's talking about value.
Carl: For sure.
Michael: The problem is not that some advisors’ AUM fee is the equivalent of $1,500 an hour. It's that someone out there, there's an advisor generating the equivalent of $1,500 an hour that's basically doing nothing and delivering almost no value beyond tending a portfolio that is basically just tended because a software hits a button to rebalance it once a year. So to me, the way we need to highlight this is not AUM is good or bad or this much an hour is reasonable and this much an hour is not reasonable. To me, that's the equivalent of buying a Ford and driving a Ford and loving your Ford and shouting at anybody who has a high-end BMW about why they're a freaking idiot because they could have gotten transportation to get from A to B for half the price or more, or less. And that may not be why they bought the car. There may be a whole lot of other things that they see in the value there, and we have to at least start with what the value is and maybe even recognize that part of the reason they bought the BMW wasn't even about getting from A to B. It was social status or certain luxury features or whatever it else is that you wanted in there.
So even at the most basic level, instead of saying, "Hey, you know, advisors who are doing this model are overcharging," what does it look like just to come at it and say, "We believe in giving great service and we talk to our clients four times a year. When was the last time you heard from your advisor?"
Carl: Yeah, and what good does it do for the person sitting in the Ford to be screaming at the person in the BMW? Who does it help and who does it hurt? Just the only person that's affected by that is the person sitting in the Ford screaming. So I just think we could just split this all in its head and say, "I am going to do nothing but put positive messages into the world about the value that I and my friends deliver, and I'm going to tell the stories. The reason that person is making the decision to work with that advisor is because they don't know any better. It's not their fault that they don't know any better and it's not the advisor's fault that they don't know any better.” It's our responsibility to change it.
Michael: Yeah. But it's not about the fees, it's about however is their formulated, it's about what they're getting for it.
Carl: I agree.
Michael: Not starting the conversation of “they charge you at this model, you should use that model.” But just saying, "Hey, you're paying this to your advisor. I'm just wondering, what are you getting? What are they doing for you that's valuable?" You know, "They meet with me once a year." It's like, "Cool. We actually meet with our clients three or four times a year. What else do they do?" Well, they keep my portfolio on target and rebalance once a year." "Oh, well cool, we actually continuously monitor and we'll rebalance throughout the year as appropriate. What else do they do for you?" Let the client talk about what's valuable. If what you do is more valuable for less money or frankly even the same money, they're going to put the dots together pretty quickly all by themselves. Wait, let me get this straight. You do everything my current advisor but better and it'll add up to less. So great, you're going to win the business, but you don't have to go after the fees or the fee model. Go after the value. And you know what? If it turns out that they charge that much and they do a whole bunch of high end, amazing, high servicey things that the client values, that you're not going to do, hey, you might have actually found someone who pays a lot of money and is happy with what they're paying because there are people who buy BMWs and there are people who buy Fords.
Carl: And I completely agree about the value versus fee thing. And I haven't been clear about communicating. I'm even taking it one step further which is, I would just not even...and again, I'm probably wrong about this. But never in doubt, I know there are other ways to do it. But to me, I wouldn't even engage in that discussion. I wouldn't…” oh, they meet with you one time a year, we meet with you three times.” I'm sure that works and that's why I love having this discussion with you because there's more than one way to look at this. But I would just, I'd back way up and be like, "Tell me again why you came in today?" Right? And go into the discovery meeting. There's a reason they're in front of you. If you're looking for ways to...so now I want to do that. I'm not talking about the first meeting, I'm competing for the business. If I'm competing for business, it's because I haven't asked enough questions. If there are any objections, it's because I did something wrong. I need to back up and say, "Wait, why did you come in? Tell me what's important to you." Because the other advisors never had that conversation, right?
But now, let's say we want to do it in public. How do we let people know? So one way to let people know is, “those advisors are not generating enough value, or they're charging too high of fees, they're not delivering enough,” any of those ways in public. The other way would be to not make it about anybody but what we deliver. And start telling stories about the positive impact you're having in people's lives. People don't care about your awesome solutions, your better value, your lower fees. They don't care. They care about their problems and if they can see in the stories you're telling, like I don't think people want to work with the ornery guy in the Ford yelling at the guy in the BMW. I think they want to work with a person who says, "Look, here's the difference we make in people's lives. Let me tell you some stories about that." I realize we got case study and compliance stuff, but go read any of Larry Swedroe's books. You can tell stories about the impacts you make in creative ways that allow people to see it and feel it without going after someone else. So that's my theory on it, is you have no competition. I'm looking you in the eyes. If you're listening to this, you have no competition. You don't need to be competing. You need to be sharing, telling people stories. Because if people just knew what you did, there would be a line out the door and you don't need to compete. And if we got there, we wouldn't see anymore of some of the best financial planners I know in the world, sometimes get dragged into these discussions online where I'm just like, "Please, no, let's not fight." Even if there's a legitimate reason to fight, I don't think it helps.
Michael: I think you make a good distinction of that between “why is that prospect sitting across from you?” Because I think you make a very good point. They're already in your office. You're already having the conversation. If you're at that point, they're already starting to eventually depart from whoever it is that they were working with because that's why they're in your office. So yeah, at that point, I think in particular, it is much more about “what is their pain point and why are they there?”, not necessarily hammering how you're different than their old advisor. Because if they weren't interested in leaving their old advisor, you wouldn't be in the conversation already.
Carl: For sure.
Michael: It is maybe a different context, and we've talked about this as the industry discussion, the marketing of the public discussion, the getting it out there, as you know, the person who's with an advisor that charges a lot, does very little, and the client doesn't even realize it's a bad deal because they don't know what anyone else does that might even give them more and charge less. So again, even in the context of some of the folks I know that push this conversation publicly, I know that's what they're trying to get to. You're paying so much and getting so little.
But I guess at its core to me, I wish we would spend less time talking about the “you're paying so much,” and spend more time talking about the “you're getting so little,” or maybe not taking shots at getting so little from others but “here's what it looks to pay a lot and get a lot.” Let's just talk about here's what good value looks like. You're getting this many ongoing meetings, you're having these kinds of conversations, you're comfortable to call your advisor about these problems. You get these answers in this kind of time turnaround that doesn't involve waiting multiple weeks. You spell out what good value looks like and you know what? If the people you're trying to work with care about that stuff, they're going to react, they're going to call. They're going to say, "Wow, that is not what my current advisor does for me. Apparently, we need to talk." And if they don't care about it because it turns out they bought for a different reason, right, you're a Ford dealer marketing the quality of your vehicles and their reliability and their affordability to get from A to B, and that's not the thing that motivates a particular client because value is very much the eye of the beholder, they might buy something else for a different reason because value is different from them, and that's okay too. We value things differently for a lot of different reasons. But if the problem at the end of the day is you think someone else charges too much for doing too little, I wish we would talk less about the, they charge too much, and more about, what does doing too little look like and what does real value look like.
Carl: Yeah, and doing it in ways that are creative and thoughtful, rather than it being
“they don't deliver enough. Here's what we deliver.” And again, that's fine. But I just think, and you also have to think about, like, what kind of person, what kind of client do you want as an advisor, and how can you set that up from the beginning? Sometimes people hire people because they want someone to be disagreeable with. It's like what they're paying for. It's not very fun. Like, so I think if you're out in the public just being disagreeable all the time, you tend to attract people who are like, "Yeah, I want that kind of hard-hitting, disagreeable person." And if that's what you enjoy, then that's good. But the other way to do that would just be to say, "I'm going to focus on the positive work that I and my friends do, and I'm going to tell stories about that. And I'm going to talk about the time that we called in November before the end of the year and had a detailed tax conversation, and we ended up saving X, X and Y. And this is the difference it made in somebody's lives. I'm going to talk about the time we talked about doing this, this and this." Case study, examples, stories that aren't about your specific clients because I know we got all sorts of compliance issues. But I just think if we focus on the positive work we're doing, instead of the negative work in any way, fee, value, in any way, if we focus on the positive work we're doing, I think it's a better way to live. I think it's better for our profession. And I know the public gets confused, because they see negative people going after negative people and they just are like, what's the deal with you people?
Can you imagine that with a doctor? If you have a score to settle internally, settle it. There's ways to settle that, right? CFP Board, I don't know how you do that because I've never thought about it. But you don't need to make it a public fight because it doesn't help anyone. So that's my thought. I got nothing else. No more finger-wagging.
Michael: No more finger-wagging. Yeah. I guess my only finger-wagging is just like, I think we gotta stop talking about who charges the highest unreasonable fee because someone's going to charge a freaking huge fee and they're going to be awesome for it. Let's talk about the value you're getting. What's the value and consumers aren't dumb. They can figure it out. They just may never have seen what a different kind of value proposition looks like for that fee, so you don't have to take a shot at the fee. Just get out there with your value and what you do.
Carl: For sure. Totally. Amen.
Michael: Well, thank you, Carl.
Carl: Yeah, it was a pleasure. Thanks, Michael.
