Home

"Generosity for $2000 please Alex" - The Piedmont Vine

Jeopardy Clue (and it’s a Daily Double!): “They generously and unwittingly gave out 20+% raise’s on January 1, 2020”

Answer: Who are Clients working with “fee only” Financial Advisors!

I am not sure even the great Ken Jennings would have nailed that question! As all Jeopardy fans know Ken is currently leading Jeopardy’s “GOAT - Greatest of All Time” tournament finishing up on ABC this week. (Before I get rolling - about the photo...this years Birnie Christmas festivities had an additional layer of "enthusiasm" as we celebrated our daughter Meaghan's December graduation from Penn State's Bellisario School of Communications. It took several Christmas Eve visitors to polish off the Methuselah of Grand Reserve Champagne shown - now back to the regularly scheduled broadcast!)

January 2020 marks a month of true exuberance for many financial advisors as they just received a 20% + raise in their projected compensation for the coming year thanks to the unknowing generosity of their clients and a bull market. Wait a minute – what now?

 

As markets close the books on a great 2019, a year where most equity indices realized positive returns well in excess of 20%, investors are generally unaware that the “advisory fees” they are contracted to pay their advisor also increased significantly. This advisory fee increase is rarely discussed with clients, in fact usually there is no conversation at all – let alone a thank you from the advisor. Only the most diligent investors will be identifying the extent of the increase as it is not clearly outlined – as it is a single line item buried in a client’s January month end statement. Only an extremely diligent investor will take the time to look at the January 2019 quarterly fee and calculate the increase. Transparency is simply not a quality many advisors incorporate into their fee discussions with clients.

As I have written before – there are few if any other ongoing professional relationships in our daily lives where we annually pay increasingly more in fees based on outcomes that the service provider has little if any control over.

How are Traditional "Fee Only" Advisory Fees calculated?
(This example is based on a $500,000 initial portfolio value as of January 1st, 2019 where the advisor is charging 1.2% annually of the portfolio’s value– commonly referred to as “% of Assets Under Management”)

On January 1, 2019, the value of the client portfolio is multiplied by the annual Advisory Fee of 1.2% producing the projected annual fee of $6,000 ($500,000 x .012% = $6,000). This projected annual fee is divided by 4 and that resulting amount is the January quarterly fee charged by the advisor. In this case $6,000 / 4 = $1500 is the fee charged for Q1 2019.

The process is repeated on the 1st of each quarter (April, July and October).

Fast forward to January 1, 2020. Assume the $500,000 portfolio grew 20% in 2019 ending the year at $600,000. The same calculation is performed to determine the advisory fee for the Q1 2020. $600,000 x 1.2% = 7,200 making the January 2020 quarterly fee $1,800 (an increase of 20%).

What changed? Did the advisors Job get harder? 20% added work? Did they get 20% smarter?....and so on! All answers are "NO". The simple reality is advisors have been historically enjoying pay raises from clients for basically providing the same broad-based advisory services for years – and investors continue to pay it.

Over the past 5 years, a portfolio comprised of 65% S&P 500 index and 35% Barclays Aggregate Bond index has averaged 7+% average annualized growth. 7% annualized growth compounded over 5 years results in a cumulative portfolio return of over 41%. As a result, an investor paying their advisor a 1.2% annual fee has seen their advisory fees increase 41% over 5 years! In the $500,000 example above, a portfolio growing at 7% would result in projected annual fees jumping from $6,000 to $8,450 in five years!

What an investor (and an advisor) can control!
There are three main variables that both the investor and advisor have control over.

1. Advisory Fees (External Fees – aka “The fees your see”)
2. Internal Investment Fees (The fees you don’t see)
3. Risk taken inside the portfolio (increased or decreased exposure to risk assets)

All investors should be extremely aware of the above variables and clearly understand how their portfolio is priced overall and positioned relative to risk exposure.

The Piedmont Difference!

Serving our clients in a full financial fiduciary capacity, Piedmont Wealth Advisory brings complete transparency to our client relationships. Our unique client focused “flat fee” structure is extremely rare in the industry. We charge clients a mutually agreed upon flat fee based on the complexity and needs of the client engagement. As a result, our fees are not a moving target each quarter. We don’t raise our fees when portfolio values increase due to market performance or client additions. Additionally, our fee includes full ongoing financial planning in addition to the asset management.

We continually urge investors who are currently committed to advisory fees tied a percentage of assets under management to ask themselves “how much and what am I paying for?”. If you can’t quickly answer the question – please reach out to us.

Piedmont Wealth Advisory will be celebrating our 3rd anniversary next month! Thank you to all who have helped shape our success !

 

Douglas Birnie
Managing Director

 

Investor Patience and Disciplined Process – the cornerstone of Piedmont Wealth Advisory’s approach.

 

This email address is being protected from spambots. You need JavaScript enabled to view it.

Piedmont Wealth Advisory