If you have more than $40,000 under the care of a financial advisor, you may be paying that person more than you pay your primary care physician. Think about that for a moment. Your physical health versus your financial health. Does managing your money require more training? Is a mistake more costly? Which is more complicated and more critical? Your portfolio value or your cholesterol? Your asset allocation versus your EKG? Your financial risk versus your health risk? And which is harder? Passing the Series 65 or a final exam in pathophysiology?
And you thought health care was expensive. Wait until you find out how much you pay your financial advisor.
Financial advising is a popular career. Where else can you double your income for the same effort? As Vanguard founder John Bogle preached, money management has economies of scale like no other industry. Managing twice as much money costs the same. And yet the benefits of efficiency go to the industry, not to the consumer. This fact led Bogle to invent the index fund, and many of us are better off for it. But far too many continue to pay this industry for advice, and sadly, most do not know what they’re paying, what more what they’re getting.
An account that grows will do so from two primary sources: the individual saves more and the market rises. There are simply too many scientific studies to show that money managers have nothing to do with it. But they get paid more, as if they are the reason you have more money.
The math is uncomfortable, because it’s correct. And the financial industry works because customers don’t grab their calculators. Fees are the lifeblood of finance, and they’re dependent on almost no one paying attention.
Consider that $1,000 invested in stocks to earn 8% for 40 years will lose almost a third due to fees. They never seem like much, because you don’t get a bill. The money is sliced off before you get your statement.
The comparison to medical advice is stark and entirely appropriate. For about $400, one can get an annual physical, including chest x-ray, blood work, and urinalysis. That means a person with an extremely low level of savings of about $100,000 paying their advisor 1% incurs an annual financial advisory cost of 2.5 times that of their primary care physician. Sure, the medical cost is paid by insurance, but that doesn’t mean it’s free. Of course advanced medical treatment such as surgery costs more, but we’re talking about basic medical oversight of your health, and how it compares to basic financial oversight of your money. It certainly seems reasonable to wonder why your financial advisor is more expensive than your doctor.
And imagine a financial advisor with a big-time football coach making $5 million after taxes as a client. The advisor charges 1%. That’s $50,000 a year. Or 125 years of medical advice. Now, if one earns that much money, and if they’re not a financial expert, maybe they really do need a financial advisor. But does a cost of 125 years of medical advice seem reasonable? And that is just for one year’s after-tax earnings. Sure, they can afford it, but isn’t it a bit bizarre? One year of financial advice would pay for a hip replacement. Just a couple of years of financial advice could pay for coronary bypass surgery, which the coach may need if they ever learn how expensive their financial advisor is.
No one is arguing that financial advisors provide no value. They’re very good at behavioral coaching, meaning to keep their clients calm and consistently in the market, adding more savings as the client’s income grows. They can provide useful projections of retirement assets under the current plan. They have many other financial planning services they can provide, though most are rarely needed most of the time by rank-and-file clients. But should these services cost far more than that of a primary care physician? The latter also provide a wide range of services, all of which improve your health. But you pay for them as you need them.
How does the industry get away with it?
Sheer ignorance. Research has shown that most people are not good with percentages. They dread doing the math, so they just accept the percentage. After all, it doesn’t sound like much, does it?
What can one do about it? For starters, all fees are negotiable. It is easy to ask the advisor for a smaller fee. A sliding scale would even be appropriate. Some firms will offer it. Others may not. It is worth asking.
And why not a fixed fee? Virtually every personal service involves either an hourly fee with an understanding of the approximate number of hours or a flat fee. Monitoring your money does not require continuous oversight, and most of the work is automated.
Why can’t financial advice be structured to be as simple as medical advice? Because the industry has created the perfect model, one that works based on client ignorance and disregard. It’s time for consumers to raise questions. What am I paying? What am I getting that I couldn’t have gotten with a target date fund, a robo advisor, or just an index fund? Questions about your RMD? Your mutual fund will let you know, free of charge. They have to. How to get your money out when you retire? They answer that too. For free.
Consumers need to learn the truth: your financial advisor is a lot more expensive than your doctor. But it doesn’t have to be that way.
