John Lefferts' Blog

Monday, June 15, 2015

"Fee Only"-does it really matter?

Last week there was some Industry buzz around CNBC releasing their list of the  top 100 fee only wealth management firms. In response, Michael Kitces posted an article on his popular blog calling out CNBC because 9 of top 10 "fee only" firms are not actually fee only . It turns out that 9 of them had disclosures in their form ADV that they actually share insurance commissions. Michael is as knowledgeable on insurance products and comprehensive financial planning as anyone in the industry. So he wasn’t coming at it as an ADV thumping fee only zealot. But he was calling out CNBC and to a lesser extent the firms holding themselves out as fee only when in fact it’s not true. It causes me to think, with the industry changing at break neck speed and the organic harmonization of business models, does the moniker of “fee only” really matter?
"Pretty words are not always true, and true words are not always pretty"
The vast majority of “fee only” advisers earn their revenues from charging a % of AUM and not for giving comprehensive financial planning advice. They would argue that they’re giving the financial planning advice for free but being paid via AUM. So, if the client pulls their assets away from the advisor, would the advisor continue to give free advice? Probably not. In an editorial for Investment News, Bert Whitehead offered an interesting point of view in a piece titled Most financial advice is tainted by advisers' self-interest . He states “Investment advisers offer investment products for a commission, which may be a front-end load, a back-end load or a continuing load for assets under management. All are commissions contingent on a sale, so they are salespeople. “Gathering assets” is a sale” I believe he is saying that even “fee only” advisors who charge solely on AUM are in fact acting in a sales capacity with different, but as many conflicts as those who work on commission. He infers that to be truly “fee-only” and adhere to a fiduciary standard by providing comprehensive advice free of conflict, charging a retainer and/or hourly fee is the only way to do it. There are many advisors I know who would take offense to this point of view, but when you really think it through, it’s difficult to argue otherwise.
"Solid character will reflect itself in consistent behavior, while poor character will seek to hide behind deceptive words and actions" –Myles Munroe
So, why are a subsect of advisors and the financial media so hung up on the moniker “Fee Only”? Does the buying public really care and is it really a positive differentiator? Frankly, not only do they not care, but studies have shown that they don’t even know the difference between all the various flavors of advisors that make up our industry. Even further, the public generally has a negative perception of the term “fee”, so holding oneself out as “fee-only” may appeal to other “fee-only” advisers and the financial media, but it’s not helping the profession. I have a feeling that if Kitces went further down the CNBC list, the 9 out of 10 ratio would hold true throughout. And I really don’t think it’s necessarily a bad thing. To offer a comprehensive approach, including tax planning, estate planning and insurance advice, financial advisory firms SHOULD be involved in more than investment management. And they should be compensated for it so long as they're acting in their clients best interests.
With robo’s gaining traction with money management, those advisory firms that rely solely on revenues from AUM are facing a similar threat as travel agents did once the buying public figured out they could book travel themselves online. We should be seeing a drift away from “fee only” investment management, which represents the majority of “fee-only” advisors today and towards true comprehensive financial planning. And if memory serves me right, the principal topics of the CFP exam devoted as much to insurance as it does investments. The argument that fee only AUM advisors are more pure than commission greedy brokers is old and dated in a business where financial publications are writing leading stories titled 2015 compensation survey-the slowly disappearing commission and the majority of wirehouse and IBD revenues come from fees. I get that many in the industry want to professionalize the business and distance themselves from the image of commission hucksters. But to do so while not addressing their client’s comprehensive needs so as to be termed “fee only” isn’t the way to do it.  It’s divisive, misleading, misunderstood and doesn’t further the interests of either the advisor or the profession. It’s time to lose the obsession with the term “fee only” and care more about acting in our clients best interests, regardless of how we are compensated.
"The worst form of arrogance is deliberate humility; For it is pretentious and deceptive"