Archive for the tag 'financial adviser'

Chuck Jaffe — MarketWatch Column on Financial Advisers

Kurt Brouwer October 8th, 2007

Chuck Jaffe at MarketWatch pens an interesting column on financial advisers, what they charge, what their minimums are (on average). By way of background, when he uses the term financial adviser, he is referring to a fee-only registered investment adviser (RIA). An investment adviser typically concentrates on investments only. The term financial adviser is used by many to refer to an RIA firm that manages investments for clients, but also offers broader services (such as retirement planning, financial planning and so on). Financial advisory firms typically must register with the Securities and Exchange Commission and follow guidelines as to how they practice. The term fee-only refers to a firm that charges clients a fully-disclosed fee based on assets in the client’s account. Some firms charge fees based on the client’s entire net worth, although this is a pretty small minority [emphasis in the original]:

Every shred of evidence on the subject suggests that record numbers of consumers are looking for help in managing their money. But very little of that research gives consumers an insight into how financial advisory practices actually work, an insight that is important when it comes to getting both good help and good value for your money.

So when Rydex AdvisorBenchmarking, an affiliate of the company that runs the Rydex family of mutual funds, issued its 8th annual study on registered investment advisers, consumers working with advisers or considering the need for help should have taken some notice…

…If you have a financial adviser or are thinking of getting one, here are the stats you should have noticed from the Rydex AdvisorBenchmarking study, and what you might draw from them:

…The average account minimum, according to Rydex AdvisorBenchmarking, is now $408,000, up from $345,000 a year ago…

In terms of account minimums, this average seems low to me. Most firms I know of have at least a $1 million account minimum. I know that sounds high to many who are struggling to build up their investment portfolio, however the account minimum is also tied to the fee schedule used (the average fee schedule starts at 1% of assets per year) and to the services provided.

...Advisers raised their assets-under-management fees for the first time in three years, with more than 70% of the firms polled saying they hiked prices.

The average fee for assets under management is now a flat 1.0%, according to the Rydex survey. If you ask most consumer advocates for the level of fees they think is appropriate, the industry has now reached it; as a general rule, anything north of 1.0% of assets under management is pricey.

While there are times and reasons why an investor might pay more - including someone starting with a small amount of assets paying a fee that declines as their wealth grows - it’s hard to justify fees above this level, especially with mutual-fund expenses or annuity costs or other charges ultimately layered on top of the base fee.

Maya Ivanova, research manager for Rydex AdvisorBenchmarking, pointed out that many registered investment advisers are changing their pricing structures, finding ways to increase costs without necessarily hiking the base assets-under-management fee. “They’re charging a retainer or charging for specific products,” Ivanova says. “It’s important for investors to know exactly how they are paying and what they are paying for.”…

Advisers believe that trustworthiness is the No. 1 reason they are being chosen by customers.

There’s no surprise here, except that advisers were not asked the flip side of this, namely the reasons why they lose customers.

Consumers routinely say they are looking for guidance, emotional discipline and an adviser they can trust - and then they fire that trusted adviser the first time there’s a blip in performance…’

Chuck Jaffe makes a good point that investors can be reactive at times in the face of adverse market conditions. And, he is right, investors often do focus too much on short-term performance. But, this is actually a fault of both the client and the financial advisory firm. For example, we all know that long-term performance is critical to investment success and we also know that short-term ups and downs in the markets are generally unimportant. That is, in order to see how an investment pans out really takes several years at a minimum. Yet, as financial advisers we report performance quarterly or even monthly and many investors check their portfolios daily. So, we are all at fault to some extent for paying too much time and attention to short-term fluctuations.

‘…If your reason for hiring an adviser is that you are looking for trust and confidence, ditching that adviser the first time the market works against you is self-defeating. Stay focused on what you wanted from an adviser, which almost certainly will be qualities beyond simple performance; let those conditions - plus performance - determine whether an adviser retains your trust over time…

Trust is a very important factor in a relationship such as attorney, CPA or financial adviser. As financial advisers, we learn a lot about our clients and their goals, their problems, their assets and liabilities and, therefore, trust is very important. The following is an earlier post I did on this issue of the trusted adviser:

Charles Green, author of the Trusted Advisor, has an interesting piece on his blog describing a formula for trust [emphasis added]:

‘…When I wrote (with Maister and Galford) The Trusted Advisor, we introduced the Trust Equation:

T = (C+R+I) / S, where
C=credibility, R=reliabilty, I=Intimacy, and S=self-orientation.

(To be precise, it’s a formula not for trust, but for trustworthiness of the one who would be trusted.)

The numerator factors are pretty clear. It’s the denominator that gets most readers’ interest, and rightly so-it’s the most powerful. On a personal level, we trust someone if their focus and interest is about us: we do not trust them if their focus and interest is about themselves.

It’s why we’re sceptical of used-car dealers, telemarketers, and other stereotypes of sellers-people who clearly want our money, but less clearly have our interests at heart…’

I never really thought of a formula for trust, but I think this one makes sense. The key element is what he calls self-orientation. Is the trusted adviser thinking about your best interests or about his or her personal interests?

In the financial industry, the term fiduciary is the one that best describes the proper kind of self-orientation referred to above. A fiduciary is one who places the interests of the client first. Though this is an obligation, it is also the factor that has attracted many of us to this industry. Many fee-only financial advisers are refugees from commission-based businesses such as stockbrokerage or insurance. As financial advisers, we want to be trusted advisers for our clients and we try to earn that trust by placing their interests first.