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Editor's Letter: Fee Fight

A recent Twitter dispute between Larry Swedroe and Rick Ferri reignited the debate about financial advisor fees.

A recent dustup on Twitter between Rick Ferri and Larry Swedroe—both well-known and opinionated financial advisors—once again brought around the topics of financial advisor fees, how those fees are structured, what advisors actually do and whether they are paid too much to do it, or too little.

Both got their licks in, and clearly there is no love lost. Ferri, a well-known disciple of Jack Bogle and author of numerous books and articles on the superiority of index investing, claims that if financial advisors are to be true fiduciaries to their clients, they need to decouple advice from portfolio management and stop charging clients a percentage of assets managed because portfolio management is not where an advisor’s value lies.

More pointedly, he claims the median 1% AUM fee that advisors charge is far too high for what they actually deliver. He references data put together by Michael Kitces: The 2020 median rate for a stand-alone financial plan, Kitces found, is $2,500. Add on 0.25 basis points for a portfolio of ETFs on a $1 million portfolio, and you’re still well below the median $10,000 charged on an AUM basis for the same client. Ferri asks, where did the extra money go? As fiduciaries, advisors have an obligation to rectify the error.

Swedroe, equally well known to advisors as the director of research at Buckingham Asset Management and author of books like The Incredible Shrinking Alpha, is offended by the charge. Buried in that 1% is not just a financial plan but also implementation, monitoring, adjustments, tax management, occasional late-night phone calls from stressed clients, etc. ... A $2,500 stand-alone plan may limit the service levels a client can expect. An hourly rate may disincentivize clients to reach out when they have questions. The size of a portfolio can be a (imperfect) proxy for complexity; the bigger the portfolio, the more an advisor does for the client: Who is to say they are getting shafted in an AUM model?

There’s no one answer: All compensation models—percent of AUM, retainer, hourly—have their place, and all have flaws. I’d like to think that Swedroe is right when he says the market will determine how much clients will be willing to pay for what value they receive—though anyone reading this, if they are honest, knows the occasional advisor who is getting away with highway robbery. Clients don’t know what they don’t know.

The trick is in that nebulous concept of “value.” What is it? A quantifiable variable across all clients? Advisors are delivering a service that can’t be tallied on a spreadsheet. How much will clients pay to be relieved of stress, have some assurances or get a single bit of information over a quick phone call or email that saves them from making costly mistakes?

Many advisors may be overcharging clients, I don’t know. I think people who pay for “organic” sugar are also being fleeced, but who am I to say? The industry can’t target an appropriate rate from the top or be shamed by industry scolds into lowering their fees. Clients will pay for what they perceive is fair value. As they learn more, that perception of value will change, and they will adapt. Regardless of the fee structure, the best advisors aren’t manufacturing widgets and should not be paid as if they are. 

David Armstrong

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