Financial planning knowledge to help you better serve your clients.

While the standard rule-of-thumb is that financial advisors charge 1% AUM fees, the reality is that as with most of the investment management industry, financial advisor fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50% than 1%.

Yet at the same time, the total all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds that most financial advisors still use, not to mention transaction costs, and various platform fees. Accordingly, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%!

On the other hand, with growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversified asset allocated portfolio. Instead, the standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning).

The end result is that comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Instead, costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented, such that advisory fees must really be broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee.

From this perspective, the reality is that the portion of a financial advisor’s fees allocable to investment management is actually not that different from robo-advisors now, suggesting there may not be much investment management fee compression on the horizon. At the same time, though, financial advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as financial advisors increasingly shift more of their advisory fee value proposition to financial planning and wealth management services, advisors are still struggling to demonstrate why financial planning services should command a pricing premium in the marketplace.

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Whenever a financial advisor is starting a new firm – whether it is because they are breaking away to the independent channel, or simply just starting a new firm from scratch – there's a lot to deal with, but one seemingly simple question that tends to stump most advisors is what to name their new advisory firm. Of course, clients will still be hiring you - the financial advisor - because of your skills and capabilities, not your firm because of its name. But nonetheless, the name represents the identity of the firm, and the brand that you will build. Which raises the question: if you are the primary advisor, should you simply name the advisory firm after yourself? And if you plan to build an advisory business beyond yourself, does that mean you need to avoid having your name on the door of the firm?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss when it is good idea to go ahead and name your advisory firm after yourself, the scenarios where it can create challenges, and why ultimately whether your advisory firm grows into a business or not is much more about the mindset you have for your business, than whether you put your name on the door (or not)!

From the perspective of getting clients and building business, one of the greatest challenges we face in financial planning is that we sell an intangible: “advice”. Financial advice isn't something the prospective client can pick up and look at in a store, and consequently he/she has to look to other intangibles to decide whether to work with you as a financial advisor. Large national firms can rely on being a recognized brand to attract new clients, but most advisory firms are too small to rely on national branding alone. Instead, they get their clients by building a personal relationship with them, to become someone the client knows, likes, and trusts. As a result, most solo financial advisors simply put their own name into the advisory firm name... as in the end, if you're John Smith, and you call your firm Smith Financial Planning, it simply helps connect the consumer to you!

Indirectly, however, this actually illustrates the second key issue when it comes to naming your advisory firm, and whether it’s a problem or not to name it after yourself. The question is: what are you really trying to build? Are you trying to build a real, standalone business? Or is your business simply an extension of yourself? If your firm is meant to be founder-centric, then by all means call it Smith Financial Planning. But if you want to build a business that is bigger than just yourself, do you need to have a more "generic" name? The prevailing view out there is "Yes", but the reality is that there are a lot of big businesses named after founders, that have had no trouble being successful even though the founder's name is still the company name - including Ford, Dodge, Chrysler, Deloitte & Touche, Merrill Lynch, Morgan Stanley, Edward Jones, Raymond James, and Charles Schwab, just to name a few. Ultimately, the founder's name wasn't just about the founder, but became a brand that represented the company itself... and in most cases, the company named after the founder has already outlived the founder themselves!

What really distinguishes companies that grow beyond their founders into businesses is not whether the founder has their name on the door or not, but whether the founder has a mindset to build a business beyond themselves. In point of fact, many advisors who do want to build big businesses ultimately create a name for the business that is not their own... but not because it's necessary to build the business and attract talent. It's simply that the naming decision reflects what is already their mindset to build a business. By contrast, many/most advisors who name the business after themselves have a desire to create an owner-centric practice in the first place... and so naming after themselves is only natural (but it is an outcome of the mindset, not a cause of whether the business grows or not!).

There's also the common question of whether a founder-named business limits its ability to be sold in the future... and whether an advisor who wants to sell the firm someone needs to not have their name on the door. But the reality once again is that the answer to this question comes down to mindset - in this case, the mindset of the buyer, and what he/she is looking to do. Does the buyer want to build their own owner-centric firm? If so, then they may want their name on the door, and it is possible a generic name will make that transition easier. But if the buyer is interested in buying and growing a business, the reality is, the buyer buys the business, and its brand, not whether the founder's name is on the door. For instance, Edelman Financial has been bought and sold more than once over the past 20 years. It still has Ric's name on the door, but that name is not a limiting factor when buying an institutionalized business... and in fact, the brand is the asset to the buyer!

Ultimately, the fundamental point here is that what really matters is not whether the founder's name is on the door, or whether there is some neutral name instead. But rather, what matters is your mindset as an advisory firm business owner. Are you trying to create a business that's bigger than yourself? Or are you trying to create a practice that's built around yourself? For many who are trying to build a business bigger than themselves, they will often pick a neutral name, but it's really not a necessary factor for success. Instead, it is simply a signal of their intent. Because in the end, if you want to build a business that's bigger than yourself, you can absolutely do it... "even if" your name is on the door!

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