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What is it I am paying you for?

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May 12, 2008 11:48 pm

During a recent discussion the topic of paying for advisor fees to a financial planner came up.  So during my "mock" interview, the question gets popped:  "So, for the small fee I pay you for advice, what do I get in return for this fee".

You see? How does one quanitfy an ROI to justify the cost of this fee? To me, it is a fixed cost, but also an "investment" in having someone assess, manage and advise on your financial affairs.  I don't think a good answer is simply that a planer will prepare reports and spreadsheets for people. What do you think?

Any takers on this? Comment away, as it would be very useful in preparing for any eventual objections to charging advisoy fees for services. 

May 13, 2008 2:03 pm
Anyone can tell you why they pay a dentist, doctor, lawyer, accountant, mechanic, etc., to perform a service for them, but unfortunately, it seems that more and more people are having to be convinced that they need a financial advisor. That is, we "create a problem" so they'll pay us to solve it. (Or at least we attempt to solve it, and get rich in the meantime.)   Sure, a person can DIY any of the services performed by the professionals I listed above, but if a mistake is made, the consequences can be severe. And a person can definitely screw up their portfolio by DIYing; however, there are so many resources available today,  a person can quickly become competent in investing. (Hint: Index Fund.)   In a nutshell, I sell mutual funds. I don't do any research, and I've stopped even building my own portfolios. Why go out on a limb when I can slide someone right into a pre-constructed portfolio? Then, I take 5.75% off the top.   Are my portfolios any better than what Joe Blow investor could do on their own with an index fund or with a minimal amount of effort, and at a much lower cost? Nope. But my fee includes a quarterly phone call where I'll tell you to "Hang in there. It'll come back."   This is the only profession I've seen where those who work in the field regularly ask their colleagues how they should respond to inquiries of, "What is it I am paying you for?"   If we can't answer that question without having to poll our co-workers, we've probably got some soul-searching to do.     
May 13, 2008 3:01 pm

ice, that was a great PS at the end of your post.

Jedi, I ALWAYS tell my clients the DIY "rule of three":

To do it yourself you MUST have three things:

* The time to do it yourself

* The desire to do it yourself

* The knowledge to do it yourself

Two out of three just does not work (and can be worse than 0 out of 3).  Unless you have three out of three, you must hire someone to help you. That's where I come in.

May 13, 2008 4:19 pm

We keep people from making the big mistake.  What does that mean?  It is different for different investors.  It may be the guy who wanted to bail out in January of 2003 and move to CD’s.  It may be the guy who wanted to load up on tech stocks in 1998.  It may be the guy who is constantly trying to buy what we wanted to own last year, not this year.  It is lots of different things, but saving a client from the “Big Mistake” just once, whatever it may be for them, will pay for 20 years of my fees.

  I recently had a new client ask me why he should pay me $2,000 a year to manage his money.  When he came in to first see me, he had a check for a couple hundred thousand that he was cashing out of his recently deceased mother's IRA.  I helped him get it back in the IRA, and avoid $50,000 in taxes when we did that.  I told him that if he had done this without getting advice from a financial planner, he would have paid $50,000 too much in taxes last year, and it was going to take 25 years of fees to just break even on the advice he had already received  for free.  He said "Good point," and signed the papers.  He has not mentioned fees since.
May 13, 2008 9:33 pm

This is just the responses I had hoped my posting would incite for discussion.  Borker, your reply had some validity, but if you think selling based on product will win the day - good luck.  Personally, I will never sell to a prospect based on product.  Those days are long gone.  I enjoy the discussions on this board, and may from time to time throw out a hypothetical.  It is a good way to network with peers, and keep in touch.  I don’t hang out at clubs and chew the fat, so when I’m not out networking in person, this forum is where its at.

I explain to everyone why they need me, when they could otherwise do it themselves? One response I use is in comparing what they do in their work:  "Mr Prospect, while you are a professional in engineering design and commit the time, effort, and education to becoming an expert in your field, I have been doing the same in mine - to being the best in the financial field.  All my efforts go towards being your trusted financial expert.  The small fee that I charge is your investment in my expertise, in charting a course for the long-term financial health for you and your family."

Either they get it, or they don't.  Just don't dwell on the "not doers".

Everybody, this is a great dialogue going on here. 
May 13, 2008 10:32 pm

What I try to convey to the client is that they are getting more than just product placement.

  They are getting the knowledge of financial planning and investing that has taken me years to accumulate.  Stressing my time in the business, education and training and make them aware of the services and strategies that I can and do often provide. GENERAL FINANCIAL PLANNING ADVICE Estate, retirement, college funding planning Long term care planning Life insurance Health and Disability Insurance Charitable giving planning Gifting strategies for generational transfer Equalizing inheritances Loan and debt counseling Trusts (not an attorney, but I can recognize the needD and refer to and work with several attorneys) Income tax planning (same thing: I'm not a CPA and don't do taxes but I can recognize when they need to see a professional and help them with some strategies and investments to minimize taxes) Retirement plan structuring and funding for businesses.  Qualified and NON Qualified.

Oh, yeah.....and I can analyse your ENTIRE investment portfolio even those things you don't have with me.  Purchase stocks, bonds etc.

If all they think I do is slog product at them they are sadly mistaken.   If all they want to do is "trade" equities and not look at the whole picture, then maybe they are better off with E-trade.   My fee covers all of the above. I think it is well worth it.   Not everyone is suitable for an advisory account either. 
May 14, 2008 2:48 am

I try not to do much stock business anymore. But, I did use a good explanation of why our commissions are so much higher than Schwab, TD Ameritrade, etc.

  Mr. Client: "Why do you charge me $350 to buy this stock when I could go to Schwab and get the exact same stock for $30?"   Me: "That's a great question (hamburger reference for you Jones guys). When you buy a stock at Schwab, once they have put that stock in your account, their job is done. That's probably worth about $30. Has Schwab ever called you about any of the stocks you own? (always answers no) However, when that stock goes in your account here at XXXXX, my job is just starting.  Since we invest for the long term, you may have that stock for five or ten years, or longer.  Since we don't charge you to hold stocks, what is my time and effort worth to keep up with your stock, review your account, etc. for the next X years worth?  Sometimes, it feels like at $350, I'm underpaid ."   Most clients would realize that I wasn't simply offering them a stock, I was providing investment services that were worth more than $30. Now, if the client came up with the stock idea himself, I would sometimes recommend he go to a discount broker, especially if I didn't follow that stock.
Jun 13, 2008 7:38 am

Q: Why do I need to pay for something I could do myself?

A: You probably could perform many of the services I provide. We’re not curing cancer here. The problem is not that you can’t do it, but that you won’t. I’d like to loose 10 lbs and if given the opportunity to pay 1% of my meal tab to someone else to put in the exercise necessary to offset the meal I would, not because I don’t have the ability to jog 30 minutes each morning, but because I know that I won’t do it, or at least continue to do it. Having worked for a discount firm myself, I saw the same story several times. A client who ‘can do it himself’ starts of with a great deal of enthusiasm and activity, then gets busy, bored or both after a brief period of time and just stops paying attention. This is where I come in. I’m not “trying this out.”

Jun 13, 2008 1:31 pm

X, that’s a great response.

  Borker, I don't think it's a matter of us not knowing how we bring value to our clients, but rather our ability to articulate it into words that clients can both understand and appreciate.  If left to my own devices, I would probably tell clients "because you're a dumb-a$$ that couldn't get out of your own way.  Without me, you will read Money magazine, buy the most popular funds of last year, in the hot sectors from two years ago, and throw in a few 38 cent "hot stocks" that your buddy in Marketing is telling everyone about.  You will buy too high, then sell too low when you are freaked out because your portfolio is down 20%.  You will then go back to Money magazine and repeat the whole process all over again.  Or, you will be a little nilly and put everything into CD's."   So, as you can see, that's what we help clients do.  Make money by not destroying themselves.  It's amazing - I would like to see how many DIY investors actually get index-level returns over time.  I would wager very, very few.  The fact is, if every DIY investor jsut took the advice of indexers, and bought the right indexes in the right proportion, then left it alone FOREVER, they would probably do just fine, and better than most others.  But NOBODY does this, despite the fact that everyone is told to do this by Money, Smart Money, Fortune, feature writers, Vanguard, Fidelity, etc., etc., etc.   Now, I am NOT an indexer, I believe in active management.  However, for the person that is not willing to research money managers or use an advisor, TRUE indexing is the way to go. 
Jun 13, 2008 2:49 pm

Great thread,

  Love the losing weight, won't really do it thought.   Other professions have same problems?  hell yeah they do- I've purchased my contacts online for 7 yrs.  Finally went to an eye doc cause my prescription has changed, he asked me where I've been buying my contacts I told him online and he said that is significant competion to him and he hates it.  Realtors, accountants, bankers, seems like most services have to compete with the internet these days.    And the 2 of three remark is totaly on target.    Remember though guys.  The vast majority of people who bring this up have either already made up their mind not to pay, or sooner or later will decied they don't want to pay our rather sizable fees.    Trying to convince them of your value is generally a losing cause.  There are plenty of clients out their who value our services.  Just go find more of them.  I wouldn't spend too much time dripping on people who are relucatant because of fees.  These are also the people who will continue to bitch about fee for the rest of your relationship.   
Jun 13, 2008 3:05 pm

If all you bring to the table is picking mutual funds (or fund managers) IN A SIMILAR MANNER as the client would pick (assuming the client has that aptitude) then the client will be wondering why they’re paying you.

I would too.

If you bring new ideas to the table to maximize their assets and income, then the fee is a small thing compared to the real value you bring to the relationship.

If I am able to show a retiree how to double their retirement income on a GUARANTEED basis, reduce their risk and leave a significant estate for their beneficiaries, then they’ll pay the asset management fee as part of my financial planning program.

It’s the difference between being just an asset gatherer and being a personal financial strategist.

Jun 13, 2008 4:27 pm

ADVISOR: "Mr. Prospect, I earn my compensation the same way doctors do, by advising people to do what they don't often want to do and also by advising them to not do things that they very much want to do. And, as with the doctor, you are free to accept or reject this advice. But you must also live with the consequences. In the long run, both medicine and money reward rational behavior and punish error.

"As mere humans, we often feel strongly tempted toward missteps that have upset many other investors' plans. But with my help and counsel, based on the confidence and trust that comes from straight talk (and that's all we give here) … we'll, you've seen the numbers. How will the huge advantages of doing the RIGHT things affect your investing goals?"

And then SHUT UP! (The next person to speak loses.) That's it. You've promised nothing other than honesty and straight talk, which really are one in the same. Now it's up to them to decide whether to pay you for professional advice or just wing it.

Jun 13, 2008 4:41 pm

B24 - What is it about active money managers we, and prospect, should be “researching?” And what should those money managers themselves be “researching” to allocate fund assets? If you get a chance to weigh in on the “Portfolio Management” thread in response, that would be terrific.

Not sure exactly what you're asking. But when I say "researching", I am really referring to picking funds, allocations, reviewing fund objectives, analyzing asset classes within fund holdings, etc. in order to avoid picking 12 Emerging Market funds because those were the best performing funds last year (when you think you are diversifying because you own 12 funds), or if you really are indexing, picking the REIT Index a few years back because it was up 4,000% over the past 5 years, or picking the Health Care Index in 1999 because it was going to the moon....I think you get my point.

When I use the term "research", that is a pretty broad term which includes (for the active money managers) analyzing asset allocations, weeding out value plays versus value "traps", weeding out growth plays versus overpriced stocks (ala 1999), etc., etc. Even if an advisor is an indexer, there is still "research" and skill used in picking the tactical asset allocations. I sure don't claim to be the one to decide those allocations. I would rather hear what Goldman Sachs, or American Funds, or EDJ, or Merrill, or Morningstar, or whoever has to say about asset allocation. And this is something that the average DIY'er will not be aware of or follow (though they could if they were diligent enough).
Jun 13, 2008 4:51 pm

If all you bring to the table is picking mutual funds (or fund managers) IN A SIMILAR MANNER as the client would pick (assuming the client has that aptitude) then the client will be wondering why they’re paying you.

I would too.

If you bring new ideas to the table to maximize their assets and income, then the fee is a small thing compared to the real value you bring to the relationship.

If I am able to show a retiree how to double their retirement income on a GUARANTEED basis, reduce their risk and leave a significant estate for their beneficiaries, then they’ll pay the asset management fee as part of my financial planning program.

It’s the difference between being just an asset gatherer and being a personal financial strategist.

  Folks, this is the only way you can justify a planning fee.  Anybody can get on, punch in the same search criteria as we do, and pick funds for a 'proper asset allocation'.  And for all that research, all we can do his hope that it works out.  The value is debatable.    However, when you can immediately impact a clients' life through increasing income, reducing taxes, leaving a bigger legacy, etc., THAT is how you justify your worth.   Very nice post, skippy.
Jun 13, 2008 5:36 pm

I would just say something along the line of:

  'Hey look, man. Tell me you don't like my firm. Tell me you don't like my idea. Tell me you don't like my f***in' necktie. But don't tell me you can't put together 2,500 bucks.'
Jun 14, 2008 1:00 am
I respectfully disagree with whomever it was early on on this thread that if you ahve to think about saying what you do, then rethink your career (or something like that). I know exactly what I do, but i think its the hardest thing to communicate without sounding cheesy and canned. I think all the analogies to what a doctor does, or analogies with other professionals just doesnt cut it, sounds corny to me. Maybe its me, i dont know. After 8 years in the business, I am still working to come up iwth the right combination of words and thoughts.   I like the phrase "personal financial strategist", that skippy uses.  What i do is act as your personal financial strategist, which means i combine my knowledge of all the financial disciplines, such as investment planning, tax, planning, estate planning, with a passion for what i do, to make a better life for you and your family. Part of that process involves putting at your disposal, all the resources of the largest financial services firm on the planet, and the best part of that is that there is only one phone number you have to remember, and thats mine.   Admittedly too long to say in an elevator or at a cocktail party, but maybe not bad for a meeting with a prospect. I'm open to criticism.   This thread, along with the Portfolio Management thread, which I started, but left to others to finish, are invaluable. These are the kind of dialogues that make this forum worthwhile.
Jun 14, 2008 3:20 am

“I help people achieve whatever it is they daydream about at work.  What would you rather be doing?”  This is my 30 second elevator blurb.  During the appt, same statement, adding “I give you the best opportunity of being able to…”

Jun 14, 2008 4:32 pm
Is this truly a common problem?     Seriously, do you guys really have that many prospects/clients who don't feel you are bringing value to the table???  Sure I have a couple a year, but honestly I explain it to them and they either see the value or don't.  For me it hasn't been that big of a deal.  No direct attack here, but maybe you guys are either not bringing enough value to your clients or just not explaining to your prospects what value you bring and everything you will be doing for them.  Explain it to them in your proposal and they won't ask why it costs so much nearly as often.  If a propect (pre-proposal)  asks you flat out why should he pay you to help him, just say let me give you a no obligation proposal and show you our process and what we do and you will understand all of the value we bring.   
Jun 14, 2008 6:49 pm

In answer to DK, I'll speak for myself only.

 When it comes to clients this is a non issue. I just dont lose clients, other than some smaller ones here and there who I shouldnt have taken on anyway. For me, this is an issue when talking to prospects, who havent worked with me, and thats a good response you laid out, ie "let me give you a proposal and show you our process and what we do..." Many of the prospects i come accoss, are just not cut out to be my clients, and i can usually smell that early on. When I do, honestly i dont try real hard because I know no matter what i tell them, or convince them of, as soon as the market is down 5% I have to resell them on my value, and honestly, life is too short. Most of these are smaller accounts. But other times, you (hopefully) present to prospects that have potential to be good clients, and thats where it can sometmes be a challenge. I often find that if i am talking to them from stricly an investment perspective, its tough. But if I am talking to them about planning, crunching numbes for retirement, positioning money in a tax efficient way, and talking to them about providing for their heirs, it becomes much easier. My issue is how to put that into a sentence or two, without sounding like a cornball reading from a textbook. Just my 2 cents.