Are You Worth It?
Your clients may be asking themselves that very question.
Disclosure Is Key
Structuring your fees intelligently and explaining them to clients is also essential. The advisor mentioned above made what now could be characterized as a business-saving change to his fee structure years ago, according to Bachrach. He added a “minimum fee” as a safety net to his 1 percent. If client assets drop to a certain level, a minimum $8,000 fee kicks in. Contrary to what your clients might initially think of this arrangement, it's good for them too. Instead of forcing you to frantically resize your business from boom to bust and back — laying off staff and fretting over business costs — a minimum fee protects an advisor's revenue and allows him to stay focused on clients when they are demanding even more of his time.
Taking stock of the firm you work for, and the kind of services it allows you to provide, can't hurt either. Not surprisingly, a number of studies have emerged in recent months that evaluate financial service providers. A recent Consumer Reports survey of 9,000 subscribers asking them to rank 17 brokerage firms on customer service in 2008 certainly speaks to clients like Jack. The so-called discount brokers scored higher than their full-service peers. Vanguard and Edward Jones were standouts and other firms like Charles Schwab, Scottrade, Fidelity Investments, TD Ameritrade and T. Rowe Price also had high rankings. The lowest rankings included names, such as Merrill Lynch, Ameriprise Financial and Wachovia Securities.
Philip Palaveev, CEO of Fusion Financial Advisor Network, says clear investment policy statements can also help define the goals, scope and nature of your relationship with clients. But he says industry standardization would also help. Financial planning is relatively well defined because specific parameters have been set by the CFP Board of Standards, and it's also the fastest growing of the industry's disciplines. According to the Cerulli study, 60 percent of advisor respondents said they planned to offer more financial planning services in the coming year. But, unfortunately there's no regulation about what a financial plan should include, just who can offer full-blown financial advice (an RIA advisor). Meanwhile, what is wealth management, for instance? Visit a dozen sites and you'll get a wide range of answers.
Back to Jack
Jack's advisor says on his firm's website that he is a CFP who specializes in “executive financial counseling, wealth management and financial planning for small business owners.” Jack was referred to the advisor in 1996 by another executive at Xerox and he promptly gave the advisor control of 70 percent of his investable assets — his IRA account — and decided to keep his Xerox 401(k) separate. In exchange for the advisor's 1 percent fee, he and his wife get two face-to-face meetings every year in their home, 200 miles from the advisor's office, and quarterly reviews over the phone. Additionally, Jack says he can reach the advisor by phone or email fairly easily. Aside from the initial asset allocation and annual tweaks, he says the advisor has coordinated with his attorney to rework his will, filling it with the necessary trusts, etc.
In fact, there are plenty of services on offer at the advisor's full-service independent financial planning firm. It's just that Jack feels he's had to poke and prod, sometimes sniff them out himself. “He's more the reactive type,” says Jack of his advisor. By that, Jack means he's always available — happy, in fact — to discuss ideas or concerns. But very often Jack is the one initiating, especially regarding his investments, and that has bothered him at crucial points in time when he expected the advisor to take charge. For example, Jack was the one who instructed his advisor to significantly reduce his equity exposure roughly a year before the dotcom bust — a move that he says limited his losses to 25 percent, as opposed to the 40 percent losses suffered by many of his college friends and peers at Xerox.
And it was Jack who took the initiative in this crash, too. When the Dow industrials blew through the 8,500 mark, he started running disaster scenarios in his head — how low can it get before my long-term plans are kaput? Will I have to change my cost-of-living expectations? Since retiring, he hasn't touched the bulk of his assets — the IRA funds the advisor controls. Instead, he's been relying on three sources of income — his Xerox 401(k), which is almost entirely invested in guaranteed investment contracts (GICs) that have consistently paid handsome yields (but are now paying far less), his wife's teaching income, and his Social Security payments.
Jack knew he could live off those three things alone for the next few years and wait out the recession, but he didn't want to push it. So when the Dow hit 8,000, he called his advisor to say he wanted to exchange equities in his IRA for CDs. The advisor told him to hold on. He yielded to his judgment. But he said, “If it gets below 7,000, I'm in trouble.” Eventually it would go below that mark, but at 7,200 Jack, peeved that his worst case scenario was playing out and that his FA had facilitated it, rang the advisor again.“Remember our conversation?” he asked, nervous and irritated. The advisor moved 45 percent of his equity portfolio into cash-equivalents that day. (Of course, since mid-March stocks have been rallying.)
As he mulls over the last ten years, Jack finds more and more to complain about. For instance, Jack researched and bought a long-term care policy on his own. Why didn't he ask the advisor? “I had no idea he would provide that service,” he says.
Undoubtedly, Jack's perception of the advisor's value is powerfully linked to the performance of his portfolio. For ten years, as he puts it, “I was just opening monthly account statements and smiling,” he says. Not anymore. Now he reads his statements thoroughly and he also reads a wide variety of financial literature — newsletters, mutual fund research, financial blogs — things he never considered before. Books by folks like John Bogle have crept onto his bedside table.
So, what's the one reason Jack hasn't fired his advisor yet? The same reason he hired the advisor ten years ago: he doesn't want to manage his own money. “I have even less desire today to be some idiot pulling my hair out over the daily moves of the market,” he says. It's the old doctor analogy — 90 percent of the time you visit you're fine and the doctor sends you home. But it's the other 10 percent of the time that worries us. Presumably, we pay them to know the difference.
