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Professional Financial Advice: How Much Should You Pay?

In the realm of financial planning, advisors are often encouraged to use “value-based” pricing — and to determine the value of their services by comparing the results the client would get with those services to the results the client would get without those services. For example, an annual advisory fee equal to 1% of your assets under management is reasonable if the financial planning and portfolio management services provided for that fee can collectively improve your results by more than that amount. (And Vanguard’s “Advisor Alpha” research or David Blanchett and Paul Kaplan’s “Gamma” research is often used to make this case.)

But that only makes sense if this financial professional is the only financial professional with whom you could work.

If you’re at the Toyota dealership, considering purchasing a RAV4, the decision you’re making isn’t “Toyota RAV4 as compared to walking everywhere.” You’re evaluating the RAV4 against other vehicles.

It does make sense to first ask the question: do I want to buy a vehicle? Depending on your mobility, where you live, and so on, you may be able to save a lot of money by walking, biking, and using public transportation. Similarly, not paying for financial advice can be perfectly prudent for lots of people in various stages of their lives.

But for a particular vehicle to be the right one to purchase, it has to not only improve your life relative to no vehicle, it has to improve your life relative to the other vehicles you could purchase.

The same goes for financial advice. Even if a financial professional could, for example, improve your results by $20,000 per year relative to not working with a financial professional (and that’s a tall order to fill), that doesn’t mean that any price less than $20,000 per year is a good deal. You might be able to find an equally qualified professional who can provide the same service for less.

There Are Substitutes

Since starting this blog in 2008, I have had the pleasure of meeting and corresponding with lots of super smart financial professionals. But I have never met a single one whom I thought to be the only person who could handle a particular financial planning situation.

And to be clear, that’s 100% true for me as well. I believe I do a good job advising clients about retirement tax planning, Social Security, and a few other topics. But Jim Blankenship, for example, knows at least as much about those topics as I do. And so do plenty of other professionals who don’t happen to write a blog or books.

Many parts of financial planning are complicated. But they’re not that complicated. There’s nothing for which you need a one-in-a-million genius-level IQ. No matter which area(s) of financial planning you want help with, there are more than a few people qualified to help.

What Services Do You Want?

When considering working with a financial professional, the first step should be to ask yourself what services you want.

A critical question here is whether you want advice (i.e., financial planning), portfolio management (i.e., somebody who will actually place the buy/sell orders for you, to keep your portfolio at its intended allocation), or both.

If all you want is portfolio management, you can get it very cheaply through Vanguard or other robo-advisors. (Or you can get a very basic version by simply using an all-in-one fund.)

If all you want is advice, you would likely appreciate working with an “advice-only” professional (i.e., one who does not even provide portfolio management, and who will therefore not be trying to sell you such services).

If you want both advice and portfolio management, that’s where the financial planning firms that charge based on assets under management might be a good fit. But even then, not necessarily. There are flat-fee firms as well (e.g., Bason Asset Management, which charges a flat $5,100 per year as of this writing). And depending on the size of your portfolio, a flat fee could be a lot less than an asset-based fee.

Typical Costs

For advisors charging hourly, a 2020 Kitces Research survey found that the median cost for hourly financial planning was $250. A 2020 survey from Envestnet/MoneyGuide found the hourly average was $257. (I’ll be interested to see the extent to which these fees change in the next iteration of the surveys, given the inflation over the course of 2021.)

For firms charging a flat retainer fee, the Kitces Research survey found that the median annual amount was $4,000.

As far as asset-based fees for financial planning combined with portfolio management, the Kitces Research survey found that “median fees were 1.0% of [assets under management] up to $1 million. The median fee then dropped to roughly 0.9% at $2 million and 0.8% at $5 million.” The Envestnet/MoneyGuide survey found a mean asset-based fee of 1.04%.

More Than Just Costs

The point here isn’t to automatically choose the advisor who can provide the rock-bottom cost. You want to be aware of costs — and check to see if there’s an equally-good option that costs much less. But in many cases the advisor who turns out to be the best fit for your needs will not be the very least expensive option.

It’s important to determine whether this particular advisor has the particular expertise you’re seeking. Do they often work with people in circumstances similar to yours? For instance, Jon Luskin works with DIY investors. Meg Bartelt focuses on working with women in tech. Cody Garrett works with families with “FIRE” goals. Sotirios Keros works especially with healthcare professionals.

And there are other questions about the firm that could be important. For instance, some people may prefer to work with a solo advisor, while others may prefer to work with a larger team, such as the hourly-only firm Timothy Financial. A team can likely provide deep expertise on a broader range of topics than an individual can. In addition, a team can provide better accessibility. (If a solo advisor is on vacation, the firm is on vacation. If one person in a team firm is on vacation, the team is still operating.)

And there are subjective considerations as well: does this person/team feel like a good fit? Do you trust them? Do they communicate in a way that makes sense to you, or does it feel like they’re speaking another language?

Financial Advisor Licenses and Designations

A reader writes in, asking:

“I’m looking into using a financial advisor for the first time as I near retirement. I know I’m supposed to look for a ‘fee only fiduciary’ but am lost as to the titles…RIA, CFP, CFA, etc. I am not sure the pros and cons of each. Perhaps you could elaborate in an article?”

The first thing that confuses (and surprises) many people is that the term financial advisor doesn’t have any legal meaning at all. Basically anybody can refer to themselves as a financial advisor. A person who refers to himself or herself as a financial advisor might, from a regulatory perspective, actually be any of a few different things: an investment adviser representative, an insurance agent, a registered representative, or none of the above.

Registered Investment Adviser (RIA)

A registered investment adviser (RIA) is an entity (either a person or a business) that provides investment advice for a fee. A investment adviser representative (IAR) is a person who works for an RIA and provides advice on behalf of the RIA. For example, Wealth Logic, LLC is a registered investment adviser, and Allan Roth is an investment adviser representative who provides advice on behalf of the firm. Similarly, Jon Luskin, LLC is an RIA, while Jon Luskin (i.e., the actual person) is an IAR who provides advice on behalf of the firm.

Registered investment advisers (and representatives thereof) have a fiduciary duty to their clients. That is, they’re required by law to put the client’s interests ahead of their own. Unfortunately, the reality is that there are some RIAs who do not actually live up to a fiduciary standard. So a certain level of self-education is still necessary, in order for you to be able to understand what the advisor is recommending and why.

Another noteworthy point here is that you don’t actually have to be an RIA (or representative of one) in order to provide investment advice. For example, if you’re a cardiologist and your sibling comes to you asking for investment advice, you’re perfectly allowed to provide that advice.

The general rule is that anybody who is in the business of providing investment advice in exchange for compensation must be an RIA (or IAR). But there are exceptions even to that.

Registered Representative

A registered representative (also known as a broker or stockbroker) is somebody who sells securities on behalf of a broker-dealer (i.e., a brokerage firm). Registered representatives are generally paid a commission. They do not (usually) have to be RIAs because the advice is considered to be solely incidental to the business as a broker (i.e., the business of selling securities).

Registered representatives are held only to a “suitability” standard. That is, they are not required to put the client’s interests first. The only thing that is required is that they must have reason to think that the product they are selling is “suitable” for the client. And if history is a guide, all sorts of garbage can be considered suitable.

When you see, “securities offered by….” on a website or other piece of marketing material, you know that you’re dealing with a registered representative.

Certified Financial Planner (CFP)

The certified financial planner (CFP) designation is not actually a license. The entity that provides this designation (Certified Financial Planner Board of Standards, Inc, generally just referred to as the “CFP Board”) is a private entity rather than a governmental entity.

From a legal standpoint, all this designation means is that the person is allowed to use the registered trademark “CFP professional” to describe himself/herself and use the registered trademark “CFP” letters after their name.

So from a legal standpoint, this designation is not important at all. That is, there’s no service that you might want for which it’s legally necessary for the service provider to be a CFP. However, it is relevant information from a credibility standpoint, because it means that the person a) has passed an exam that covers quite a bit of financial planning material and b) has a meaningful amount of experience providing one or more financial planning services.

Certified Public Accountant (CPA)

The certified public accountant (CPA) designation is a license (at the state level). But, roughly speaking, the only things that CPAs are allowed to do which other people are not allowed to do are:

  1. Provide auditing (or similar) services, and
  2. Use the “CPA” letters.

So, as with the CFP designation, if you’re looking for personal financial services, it’s unlikely that you need somebody who is a CPA. But, as with the CFP designation, the CPA designation can be quite relevant, as it means that the person has a certain level of expertise with tax and other financial topics.

The personal financial specialist (PFS) credential is an additional designation (through the AICPA) that CPAs can get, which is akin to the CFP credential in that it means that the person has passed a test about personal financial planning and has a certain amount of experience with financial planning. But as with the CFP designation, it’s not a license from a governmental entity. It just means you’re allowed to use certain letters after your name.

Chartered Financial Analyst (CFA)

The chartered financial analyst (CFA) designation is akin to the CFP designation in that it is not a license to practice, but rather a designation from a private entity. So again it’s a situation where there’s no service for which you would need somebody who is a CFA, but it is a useful indication of a person’s experience and expertise.

Whereas the CFP area of focus is overall personal financial planning, the CFA curriculum and exams focus much more specifically and deeply on the investment side of things.

What Type of Professional is Right for You?

An important point to understand is that somebody can work in more than one of the above roles. For example, it’s common to see people who are both IARs and registered representatives. That is, they provide advice for a fee, and they also sell products for a commission. And that person might have one or more of the CPA/CFP/CFA designations — or none of them.

Are you looking for overall financial planning? Then you probably want to work with somebody who is an RIA (or representative thereof). The CFP designation (or the CPA/PFS designation) would be great to see. But it isn’t entirely necessary. For example, you might find a CFA who has also developed the necessary expertise in taxation, retirement planning, etc.

Are you looking specifically for somebody to do a certain type of tax planning for you? Then a CPA would likely be a good fit. But a CFP could be a great choice as well, if they happen to specialize in that particular area.

And of course in some related areas — estate planning, for instance — the best professional to work with is probably an attorney.

And finally, just because somebody has the right designation(s) doesn’t mean they’re a good fit for what you need. Compensation matters as well. For instance, if you’re looking for a one-time engagement, you will want to find a professional who usually works in such a manner, rather than a professional who prefers to work with clients who have ongoing needs and who are happy to pay an ongoing annual fee.

Vanguard’s Upcoming “Digital Advisor” Program

In the last couple of weeks several readers have requested that I discuss Vanguard’s upcoming Digital Advisor program.

So far, we don’t really have any information other than what is included in the brochure Vanguard filed with the SEC with regard to the program.

As far as what the program is, it looks like a standard robo-advisor platform, which in this case implements portfolios consisting of the ETF versions of Vanguard’s four “total market” funds (i.e., Vanguard Total Stock Market ETF, Vanguard Total International Stock ETF, Vanguard Total Bond Market ETF, and Vanguard Total International Bond ETF).

The program has a 0.20% all-in cost (i.e., advisory fee + cost of underlying ETFs) regardless of what allocation you have, which means that the advisory fee is roughly 0.15%.

Relative to the existing Vanguard Personal Advisor Services platform, noteworthy differences are:

  • It costs about half as much,
  • It’s robo-only (no human advisor), and
  • It has a smaller account minimum ($3,000 instead of $50,000).

In terms of the underlying holdings, it’s super similar to Vanguard’s LifeStrategy or Target Retirement funds. It would be slightly more expensive than such a fund. (The difference in cost would grow if the LifeStrategy and/or Target Retirement funds eventually get less expensive due to switching to underlying ETFs or Admiral Shares instead of Investor Share versions of index funds.)

What will the Digital Advisor program offer that one of those all-in-one funds doesn’t offer?

The brochure includes the following statement:

“When requesting that Digital Advisor manage your enrolled accounts, you’ll have the ability to impose reasonable restrictions on the management of your Portfolio by personalizing the inputs into your retirement accumulation goal beyond standardized defaults.”

It’s hard to tell without seeing the interface and without anybody actually having gone through the program, but the above makes it sound to me like there will be some option to customize the allocation among those 4 funds somewhat. (For example, I personally would appreciate the option to reduce the allocation to the international bond fund. It sounds like that would probably be a choice, but it’s not super explicit.)

One thing that the new program will offer is implementation of a basic asset location plan. The brochure includes the following statement:

“For Portfolios containing both taxable and tax-advantaged accounts, our investment strategy will aim to optimize the tax efficiency of the Portfolio by recommending or allocating investments strategically among taxable and tax-advantaged accounts. The objective of this ‘asset location’ approach is to hold relatively tax-efficient investments, such as broad-market stock index products, in taxable accounts while keeping relatively tax-inefficient investments, such as taxable bonds, in tax-advantaged accounts.”

So based on the incomplete information available at this time, it largely strikes me as “LifeStrategy/Target Retirement replacement for people with assets in taxable accounts” or “LifeStrategy/Target Retirement replacement for people who want some allocation among those 4 underlying holdings that is not available via those all-in-one funds.”

But I suppose we’ll learn more once the program is actually available.

Working as an Advisor at Edward Jones: Ethical Qualms

A reader writes in, asking:

“You have mentioned a few times that you were a financial advisor with Edward Jones early in your career. My oldest child will be graduating in May next year, and a local Jones advisor/manager is trying to recruit her to come on board as an advisor after graduation.

I am aware that they still use the old-school commission type of compensation for their advisors, which is often not the best from the client’s point of view. But what I am most interested in knowing is whether you were ever asked to do anything that felt like it was against the client’s interests, or were you generally free to operate as you saw fit, according to your own ethics and best practices.”

A relevant point here is that I worked at Edward Jones for just under a year, and I was 21-22 at the time. So while there is still quite a bit about financial planning that I don’t know, it’s safe to say that I knew much less back then. Point being, there were an assortment of things that they told us to do, which I now realize were less than ideal, but which I just accepted at the time because I didn’t yet know any better.

But, yes, there was one instance that really made me uncomfortable, even with my very limited knowledge.

Immediately after we got our licenses, we were brought back in for a week of sales training at the home office. During that week, two of the days were spent making phone calls to prospective clients whom we had met over the last few months, in order to pitch them an investment product.

We didn’t get to choose the product. On the first day we had to pitch an individual bond. We could choose between a corporate bond (one from General Electric) or an AAA-rated muni bond from the state in which the client lived. I went with the muni bond. I knew it wouldn’t be ideal for plenty of the people I was calling (after all, I had no idea about their tax situation or about the rest of their portfolio), but at least it wasn’t likely to blow up on them.

On the following day, we had to pitch an individual stock. Even back then, I wasn’t at all on board with the idea of selling somebody an individual stock, especially while knowing almost nothing about the person in question. If they put, say, $20,000 into this stock, is that a trivial amount for them? Or are they going to be in a serious predicament if the stock goes south?

In addition, we had a supervisor listening in on the phone call, without the prospect’s knowledge. And we were in a loud room, full of people making similar calls. It was about as far as away from financial planning as you can get.

I remember making a point of calling all my worst prospects (that is, people who I knew were very unlikely to become clients), calling the same numbers repeatedly over the course of the day (i.e., calling people who weren’t home 20 minutes ago, in the hope that that would still not be home now), and intentionally flubbing my sales pitch when I did actually get a hold of somebody.

My plan was to just make it through those two days, then go back to my office in Chicago and run things in a way with which I was more comfortable: constructing diversified mutual fund portfolios. (In fact, this course of action was explicitly recommended to me by the manager in the Chicago region where I was working. Even as a long-term Edward Jones broker — somebody very comfortable with a sales/commission type of advisory role — he thought that the home office’s boiler room-style sales training was terrible for both clients and advisors.)

This was ~13 years ago, so I don’t know in what ways their training process has or hasn’t changed since then. Nonetheless, Edward Jones’ business model is still based on fundamental conflicts of interest between the client and the advisor, and I would not recommend it as a place to work as an advisor (nor as a place to invest as a client).

If at all possible, for a recent graduate interested in working in financial planning, I would instead suggest Michael Kitces’ approach of trying to get a position not as a financial advisor but rather in an operations/support role at a financial advisory firm with a good reputation and client-centric business model. Any place that will hire people as full-fledged advisors right out of undergrad (and with no certifications) is almost certainly going to be employing those people in a product-focused sales role rather than actual financial planning.

Brief tangent: as it happens, the two stocks were Coca Cola and Bank of America. This was in April of 2006. Coca Cola has done great over the period — considerably outperforming the market overall. Bank of America, on the other hand, is down roughly 20% over the entire period, and it had a truly harrowing crash during the 2008-2009 bear market — at one point having declined by more than 90% (!!) from the April 2006 purchase price. Good example of the risk of individual stocks.

Using an Advisor or a Target Retirement Fund

A reader writes in, asking:

“Would the average investor be better off using the services of a financial advisor or just buying and holding a Vanguard Target Retirement Fund in their IRA and their 401K?”

Target-date fund by a mile. Not even close.

To be clear though, that answer is the result of the way the question has been phrased.

First, Option #1 — buying and holding target-date funds — is actually quite a good plan, in most cases. It’s almost a best-case scenario for a DIY investor. The average DIY investor is not likely to do as well as this plan (either because they would construct a worse portfolio than they’d have with the target-date fund(s) or because they would not properly execute the “and hold” part of the plan).

Second, Option #2 — using a financial advisor — has a questionable outcome. The average investor is likely to end up using a typical financial advisor. And the typical financial advisor is poorly informed and up to his eyeballs in conflicts of interest.

For every well informed, fee-only financial planner who charges a reasonable price, there’s another advisor who’s going to tell the client to stop contributing to their Roth IRA and 401(k) so that they can throw money into a fixed-indexed annuity or cash-value life insurance policy when there’s no need for life insurance.

The typical/median/”middle of the road” advisor is the Edward Jones sort of guy — no real experience in broader financial planning and probably just going to sell the client a portfolio of reasonably diversified yet semi-expensive actively managed funds.

Relative to the “buy and hold target-date funds” plan, an investor using a middle-of-the-road advisor will end up with a portfolio that’s a) considerably more expensive when considering all the applicable costs, b) no better diversified (and possibly worse), and c) no better allocated. And to the extent that the investor receives any advice other than portfolio recommendations (e.g., incidental tax planning advice), it’s going to be questionable at best.

But good advisors are out there. And many investors (most, even) would benefit from using them, because:

  • Most people taking a DIY approach will not do as well as the DIY approach outlined above, and
  • Most people could use financial planning advice with regard to topics other than just their portfolio.

Evaluating a Financial Advisor’s Client Investment Performance

A reader writes in, asking:

“How can you measure, and verify, a financial adviser’s performance for the sake of comparing one prospective adviser to another?”

While this is a common question for people to ask, it’s not really a useful way to evaluate a financial advisor — for a few reasons.

First, an advisor doesn’t recommend the same portfolio to everybody. The investment portfolio that is appropriate for you as a client may be wholly inappropriate for another client with very different circumstances.

If an advisor or advisory firm were to calculate something like the average annualized return earned by their clients over a given period, that figure wouldn’t provide a meaningful point of comparison to another advisor’s such figure. For example, if one advisor has a clientele that is primarily middle class retirees, while another advisor’s clientele is primarily super-high-earners in their 30s or 40s, the clients of the first advisor would probably have, on average, lower returns over the last several years than clients of the second advisor — and that would simply be the result of the first advisor recommending appropriately low-risk portfolios for his/her clients.

In short, there’s no single figure that can be calculated to meaningfully measure how well the investment recommendations of a given financial advisor have performed over a given period.

Second, an advisor shouldn’t really be trying to do anything clever with respect to client portfolios. If an advisor is putting together a portfolio for you, a simple, boring portfolio of index funds/ETFs that approximately match the market’s return is your best bet. Intentionally seeking out an advisor who shows you a backtested, market-beating portfolio is setting yourself up for disappointment.

Finally, an advisor who engages in actual financial planning does a whole lot more than just make investment recommendations for clients.

A financial planner can also provide advice about tax planning or estate planning. They can help you evaluate your insurance coverage to see if there’s anything important you have missed (e.g., disability insurance). They can help with Social Security planning, and retirement planning in general. They can provide assistance with budgeting if that’s something you struggle with. They can provide advice with regard to your employee benefit options (e.g., help determine which health insurance is the best fit for your family).

And frankly, investment management is quickly becoming the least valuable part of financial planning. While there are still plenty of people whose investment performance would be improved by working with a financial advisor, the list of tools available for DIY investors to create a low-maintenance portfolio has grown dramatically over the last decade. Investors can now choose from Vanguard’s LifeStrategy funds, low-cost indexed target retirement funds at various providers, a smorgasbord of total market index funds/ETFs, or low-cost services like Betterment or Vanguard Personal Advisor Services.

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