I recently had a conversation with a couple nearing retirement who were considering hiring us as their primary Wealth Advisory firm. After our presentation and due diligence discussions including a deep analysis of the significantly high annual fees they were paying their current advisor, the couple expressed how difficult it would be to terminate that relationship. They went on to explain how they had been working together for over 12 years and “really liked him personally” but felt the fees were in fact “way to high” and the service and personal interaction “way to limited”. After I reran the calculation of fees they were paying annually, revealed to them that they were paying a 1.1% annual advisor fee plus internal mutual fund fees of .70% pushing their annual fees up over $22,500.
I paused for a few seconds and quipped
“After hiring us, fire your advisor and rent him a vacation house for a week every September in the Outer Banks – you will be financially better off”!
Clients often cite “loyalty” to a current advisor as a reason to avoid changing. However, when it comes down to it – “loyalty” between and advisor and a client truly should always be a mutually beneficial Two-Way Street. Too often the “loyalty and friendship” element of an advisor / client relationship is a one-way street – headed generally in the advisor’s direction.
Client portfolio values have (or should have) grown significantly since October 1, 2013. Over the past 5 years, the S&P 500 has increased over 90%. For clients who are paying their advisors annual fees derived using a “% of assets under management” formula, assuming they have been primarily invested in the US equity markets over that time, their fees have increased
in 5 years.
An example to illustrate – Assuming client has $500,000 on October 1, 2013 and is paying a 1.1% advisory fee while invested in a basket of actively managed mutual funds with internal expenses averaging .70%. Further assume the client portfolio has grown cumulatively 60% over 5 years with no withdrawals made.
1.1% Annual Advisory Fee
.70% Mutual Fund internal Fees
October 1, 2013 Starting portfolio value: $500,000
October 1, 2018 Ending portfolio value: $800,000*
First Year Advisory Fees
First Year Internal Fund Fees
Total First Year Client Expense $9,000+
Sixth Year Advisory Fees $9,000+
Sixth Year Internal Fund Fees $5,600+
Total Sixth Year Client Expense $14,400
*assumes a 60% cumulative return from $500,000 to $800,000 over 5 years
In the example above – a client’s true overall investment cost increased $5,400 (60%) in 5 years. Did the advisors skill set change? Did the advisor work 12% more each year? Did the advisor become 60% smarter in 5 years? Highly doubtful! So why are investors paying increasingly higher fees each year?
Friendship? Loyalty? Fear of Change?
Nationally, there has been tremendous surge in Private Equity Funds investing in / consolidating Registered Investment Advisory firms – the reason is simple – the traditional profit margins in this industry are significant. Investors continue to pay higher fees each year – simply because their account value has grown.
Piedmont Wealth Advisory is one of the few firms in the country charging our clients a
FLAT FEE for asset management, financial planning and overall wealth advisory. In our approach a client’s advisory fee doesn’t increase as the portfolio size grows. Acting as Fiduciaries, we strongly believe this
"financial conflict free" approach is undoubtedly in our clients best financial interest. We bring over 30 years of wealth advisory experience and offer clients a very understandable and beneficial pricing approach.
Advisors' serving as
for their clients are required to put their clients’ financial interests first in every investment recommendation or when financial advice is given. If an advisor continually raises their fees each year a portfolio grows (either thru market growth or client addition of funds) – how is this in a client’s best financial interests?
Which brings me back to my opening line
“Fire your advisor and rent them a beach house each year - It would be cheaper!”
Final note – the couple did fire their advisor and hired Piedmont Wealth Advisory– however, I doubt the old advisor is receiving a free September week in the Outer Banks anytime soon!
As a reminder - please look to us for a trusted confidential second opinion on your current portfolio or financial plan!
Thank you for your confidence and trust,