March 3, 2017 – After many years of discussion and debate, new regulations have finally been enacted that require advisors and their firms to disclose exactly how much they paid (in dollar terms) for financial advice. For most people reading this, those statements were just sent out recently. Finally, we have real transparency about how much qualified financial advice (usually) actually costs. The original title of this article was going to be “Do you know….?”, but now that the reports have been sent out, the more purposeful “Did you know…?” terminology can be used.
Before reading further, stop and ask yourself… did you actually have a good feel for how and how much your advisor’s firm was being paid for the advice you received? A number of studies, polls and reports have shown that a majority of people had no clue about these matters – and a substantial percentage (about a quarter of all people using an advisor) often thought financial advice was free –simply because they never received an invoice.
There are a couple of schools of thought about why many peoples’ understanding of the cost of financial advice is so poor. Some clients like to blame advisors, claiming that advisors often dodge the question and / or offer incomplete or misleading answers when the tough questions are asked. Some advisors like to blame their clients, insisting that they have indeed made suitable disclosures and that, at any rate, it is naïve for anyone to think that advisors spend their entire lives doing pro bono work. Clearly, there’s more than enough blame to go around.
Most advisors’ firms (advisor split the total revenue generated with their employers) are paid somewhere between a little under 1% and a moderate amount over 1% a year to manage money for retail clients. The general consensus is that most advisors are paid fairly – even if their clients didn’t really understand the amounts or the mechanics involved.
What is finally coming to the open, however, is the question of value. Is what you’re paying fair for the type of advice and quality of service you’ve been getting? That’s a very 2017-type question. Previously, people had a fairly positive impression of the value they were getting from their advisors. Of course, there are many people who previously thought advice was free, too. Many people change the subject when the question of the cost of financial advice comes up. Specifically, they change the subject and talk about “value”. We need to be absolutely clear about this point: price is what you pay; value is what you get. There is absolutely no way to have a meaningful discussion about whether or not you’re getting good value for money if you don’t know how much you’re paying in the first place.
Here’s what you need to ask your advisor (and yourself): Now that I know exactly how much I paid for financial advice in 2017, was it genuinely worth it? It needs to be stressed that for most people, this is really their first opportunity to contemplate the question meaningfully. It’s easy for an advisor to justify getting paid when the client assumes that the payment was either modest or not coming from the client’s pocket at any rate. It’s a different thought process altogether when you realize you’ve just paid someone about $5,000 on a $500,000 portfolio and received precious little in return.
John De Goey, CFP, CIM, FELLOW OF FPSC is a Portfolio Manager with iA Securities (iAS) and the author of The Professional Financial Advisor IV. The views expressed are not necessarily shared by iAS.
Read CARP’s petition to reduce high investment fees and The Cost of Advice Hard to Verify in Advance.
