Earning and Validating Financial Planning And/or AUM Fees

[DHK]

Excellent blog post by Michael Kitces:

https://www.kitces.com/blog/transit...-as-dual-registered-hybrid-ria/#disqus_thread

There's a big movement to get insurance agents to become dual-registered with RIA firms. Keep these points in mind if you are considering this:

1. You may eventually need to hire service staff:

After all, by year 6 the advisor is generating $400,000 of gross revenue. Which means the advisor could hire another advisor for $80,000/year, just to give great ongoing service to the existing clients. Notably, that advisor would have no business development responsibilities. Just an expectation to provide valuable financial planning advice, great service, and whatever else it takes to retain and serve the clients well. Because every year the clients stay on board, they’re paying $400,000 of fees, and the advisor who services them is paid just $80,000 to do so. Which to say the least is a very “healthy” gross profit margin with $320,000 of net profit after the cost of the servicing advisor!

2. You need to substantiate why you are charging the fees you charge

Notably, this doesn’t necessarily mean that you have to actively manage the accounts yourself (though clearly that’s one option). You could decide to use third-party managers or separately managed accounts, or have discretion to manage the account directly and hold predominantly passive investments. But at a minimum, regulators will expect that you can demonstrate a process of ongoing monitoring of client investments – including both reviewing the accounts themselves, and periodically meeting with the clients – to substantiate the ongoing fee.

3. You should look into expanding your knowledge and perhaps credentials

Which means adding enough value to charge an advisory fee is increasingly about doing more than just creating a diversified asset-allocated portfolio and monitoring it, because that service is becoming commoditized. Instead, advisory firms are now faced with providing more and more personal financial planning advice, to help bolster their value proposition and justify their advisory fees.

For an advisor who has historically been primarily focused on commissions, this means it will likely be necessary to pursue your CFP certification (or if you already have it, consider a post-CFP designation) and expand your advice knowledge beyond your current product set. Or alternatively, at a minimum, it means going out to hire paraplanner support, or even full CFP professionals to be service advisors, to provide that additional advice value-add.

[...]

Simply put, if you’re going to transition to adding fee-based advisory accounts, be prepared to demonstrate what value you will provide beyond what a robo-advisor, or a solution like Vanguard Personal Advisor Services or Schwab Intelligent Advisory, can already do for 28-30bps.

If you're looking into joining an RIA as an IAR, I'd take a look at their ADV Part 2 brochures to determine what the ongoing monitoring and client review standards are:
https://adviserinfo.sec.gov/IAPD/Default.aspx


Here's a Kitces.com blog post on crafting an annual client service calendar:
https://www.kitces.com/blog/craftin...ancial-planners-value-to-prospective-clients/


Here's another article regarding "reverse churning" (charging fees without being able to substantiate how you are earning them):
https://www.kitces.com/blog/reverse-churning-in-advisory-accounts-problems-for-fiduciary-advisors/


If you're going to go down this route, make sure you do your homework, versus just going with the "siren song" of "get your series 65 and insulate yourself from regulatory changes" or other junk that some of these guys promote.

 

[AboutThatLife]

As usual DHK, great post!

 

[DHK]

And it's still a "race to the bottom":

Move Over 1% Adviser Fee: Change Is Here!

 

[VolAgent]

And it's still a "race to the bottom":

Move Over 1% Adviser Fee: Change Is Here!

I still question, what value do most advisers deliver? With insurance there is actually selling it, service work, etc. Most advisers are chasing people who already have assets saved, so there is very little help in accumulating the assets, mainly parking them and growing them, which the robo-advisers do quite well.

So again, what value is the adviser delivering for 1%?

 

[DHK]

I think that depends on if the advisor is bundling their financial planning and annual review services into the AUM fee or not.

I think part of the value proposition is to help people avoid making mistakes - either with the portfolio itself, or in managing transfers, not withdrawing too much, ensuring that RMD's are done, etc.

If the advisor is doing the portfolio management themselves, then there's that cost. Or if the advisor is a relationship manager for multiple money managers and just "manages the managers" and moves funds between these managers.

Just my thoughts off the top of my head.

 

[Kenneth Busch]

I think that depends on if the advisor is bundling their financial planning and annual review services into the AUM fee or not.

I think part of the value proposition is to help people avoid making mistakes - either with the portfolio itself, or in managing transfers, not withdrawing too much, ensuring that RMD's are done, etc.

If the advisor is doing the portfolio management themselves, then there's that cost. Or if the advisor is a relationship manager for multiple money managers and just "manages the managers" and moves funds between these managers.

Just my thoughts off the top of my head.

Agreed. There is a wide range of competence among advisors. If an advisor is just dumping client assets into mutual funds and charging a fee, then yes, you might as well go with a robo advisor. A real advisor would at minimum use portfolio managers that do not have to be 100% invested in stocks regardless of market conditions. A good advisor that is going to manage a portfolio will use derivatives that will protect risk and enhance income. Sadly most advisors don't know how to use derivatives or won't.

A real advisor will do analysis on where a clients assets are and advise on where those assets should be. How much will a client be getting in social security? Should you be doing Roth conversions now or later? How much risk should be in a portfolio? What is a clients goals in regard to charity and/or legacy? Many of these questions won't be answered or thought of by a robo.

My 1%, err 2 cents