Are You Worth It?
Your clients may be asking themselves that very question.
For financial advisors whose clients have seen years of hard-earned savings evaporate in the last 18 months, there's some — okay, very little — comfort in knowing there were few places to hide. The popping of the credit bubble (and the real estate buying panic) took down nearly every asset class with it. You might try to sell your clients on how unprecedented this trouncing was — a Black Swan event, really. No one could have foreseen this kind of pain, right?
Not surprisingly, many clients may openly question your investing prowess — and the fee you charge for sharing it. The story of one high-net worth retiree we know — we'll call him Jack — serves to illustrate this point. Jack, in short, is ready to give up on his long-time advisor. At age 65, after 40 years of toil, the former Xerox executive checked out of the workforce for good in the middle of 2007. He and his wife, a teacher at a grade school near their home in the suburbs of Boston, had amassed an impressive multi-million-dollar nest egg; the couple was looking forward to traveling (a private sailboat cruise with friends in the fjords of Scandinavia was slated for this year) and spending more time with their four grown children and their young families. All in, Jack's situation was enviable: The only debt he carried was a modest $220,000 mortgage balance on a 30-year fixed loan at 5.6 percent. He purchased his home in 1994 for roughly $500,000; it was valued recently at more than $900,000.
When he retired, Jack and his wife were set — the hard work and discipline of saving having paid off. Then came the historic decline in global capital markets and the arrival of what the newsletter writer and author James Grant has called “The Great Recession.” Today, Jack's total nest egg is 35 percent smaller than it was a year-and-a-half ago. He's spooked — very. He's frustrated and angry. And one of the primary targets of his frustration and anger is his financial advisor. In particular Jack is angry at having paid an annual 1 percent asset management fee in the ten years since hiring the advisor.
For what? He wonders. “Excluding my contributions and without accounting for inflation, my portfolio has grown by 0.121 percent over the last ten years,” says Jack. Paying 1 percent a year on a multi-million dollar portfolio to watch it shrink (after inflation) over a decade is a sour pill to swallow. “I'm planning the divorce. That's where I am right now,” he says.
It's safe to say the vast majority of financial advisors have (or had) at least one disgruntled client like Jack in their book. According to a recent study by Prince & Associates, a research firm that plums the hearts and minds of high-net-worth clients, 15 percent of the wealthy left their financial advisors in 2008 and 70 percent took at least some of their assets out of the advisor's hands. In short, the “value proposition” of every financial advisor is being reviewed by clients. What services do you provide, how much do you charge, and is your service worth it?
I Am Alpha
If you are like most FAs, you probably charge 1 to 2 percent on assets. According to a compensation study conducted by Registered Rep., and sponsored by Cambridge Associates, 62 percent of advisor respondents charged a 1 percent fee in 2008 while 23 percent charged 2 percent. Additionally, 73 percent of respondents said their fee in 2008 hadn't changed from 2007.
What do your clients get in return for that fee? It may not be what you think. Research conducted in the fourth quarter of 2008 by Cerulli Associates, together with the FPA and IMCA, reveals that what an advisor says he offers and what he actually provides aren't always in synch. Here's how advisor respondents perceived themselves: financial planners (59 percent), investment planners (23 percent), wealth managers (15 percent) and money managers (1.2 percent). And here's what Cerulli thought about them after evaluating their businesses: financial planners (43 percent), investment planners (45 percent), wealth managers (10 percent) and money managers (1.2 percent). In other words, fewer of you do financial planning and wealth management than you think.
Do you know where you fit? Do your clients? Right now, advisors must be especially clear with clients and prospects about how exactly they earn their keep. The bottom line is that the wealth management industry, with its plethora of designations and titles, is under intense scrutiny. Clients like Jack want reassurance that they're not paying their advisors for services they don't use, or aren't receiving. After all, who needs an advisor to lose them 35 percent or more by going long the S&P 500? Most clients can get that kind of service for free with an ETF.
“It's been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers,” says Bill Bachrach, founder of advisor coaching firm Bill Bachrach & Associates. “If asset management is all you do and you can't point to some other way you make or save money for clients, you have nowhere to hide when performance goes south.” Indeed, if you have been marketing yourself an investment planner or manager (“I'll make you money”), you are probably playing defense right now. Investment performance is a big piece of any advisor's value proposition, Bachrach says, “but for 1 percent you can do a whole lot more.” The good advisors are doing a whole lot more, he says, citing one example of an advisor he knows who, within weeks of taking on a new client, renegotiated that client's property and casualty insurance. The move saved his client $10,000 annually — more than he charges for one year in fees.
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