Valuentum Exclusive Analysis for the Discerning Investor

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Alex Skabry (Sanborn)

12 years ago, Edward Jones literally cast the "fee-based" advisers with devil himself; they were liars and stealing from the retirements of their clients. That changed fairly abruptly when they found that the "partners" could build a more lucrative business by charging fees; and anyways, everyone else was doing it and they had to compete. This, from a firm rightly known for putting the interests of a client first.

My point here is that when money is involved, you won't find a disinterested party. If fee-based advisers really were "on the same side of the table" as their clients, they'd stop billing annual fees. And if they did that, then they'd have to spend even more time trying to find new clients.

To those ends: I believe most advisers aspire to a client base of 600 to 1200 households and a book of business that exceeds $250,000,000. Clients should know before turning over their future, exactly how much time they can expect their financial adviser will spend on their retirement and their account.

In a normal work week the 1,000 household adviser probably is able to spend, at best, one hour on your account and that hour is not spent on research or managing investments; it's the 45 minutes spent with you in the room, and the 15 minutes he spent with your portfolio just before you got in his office. Don't the latest statistics show Money Guide Pro owns something like 60% of the financial planning done in America? Thus, he didn't do anything regarding planning for you either; he had his client input the information and then he clicked a button.

My mentor told me price is what you pay, value is what you get. The problem isn't that 90% of the clients don't know what they pay their adviser. It's that they don't know what the heck he does for that money. If the client you mention above had spent not $60,000 but $160,000 in fees over the ten years to manage his $100,000 account ... would anyone at all raise their voice if the client had $300,000 left? The problem here is that the adviser is taking the $60,000 in fees and providing nothing in return, and the client more often than not actually trails an index.

And on that day, not so long from now, when clients have their robo-adviser accounts blow up ... who will take responsibility? No one. Because all the firms out there will hide behind the fail safe, the Maginot Line of advisory business: Modern Portfolio Theory. If there is a part of your letter you should amplify you might want to speak to that issue.

You've done good work Brian in your letter and you stand for good things in this business. Thanks for taking the time to write this.

Thomas Judge (Annapolis)

Brian,

Your letter is "on point" and is the reason I still operate as a transaction based broker. I don't get paid unless I review accounts and make recommendations based on what is right for the client.

The transaction based system is not perfect and can be abused. When it's used correctly, it does provide a much cheaper alternative to AUM fee based mindless investing. My clients on average pay 33 basis points for my services. Couple that with your excellent research and I feel like I have a business plan that works for both me and my clients.

I am an independent advisor that has resisted the fee based trend and feel like I'm being squeezed and forced into complying with what the banks really want.

I'm told that my practice value is worth only half as much as a practice that is AUM fee based so the proof is in the pudding.

There is a reason Merrill Lynch jumped on the fee based platform before the DOL rule was even clarified. AUM based recurring revenue means more money in the banks pockets.

Most of the fee based advisors I know collect their fees and then head out to the golf course! I work 12 hour days and make less money than other brokers that have far less assets under management.

If everyone invests using a system generated pie chart, and everyone owns virtually the same funds or ETFs, how can this possibly work? Merrill Lynch is even telling it's "advisors what funds they can hold!

The whole "fiduciary" concept baffles me because not one of my clients would stay with me long term if I wasn't doing what is in their best interest!

Keep up the excellent work you do and send the letter!

Tom Judge



Thomas Judge
tjudgejr@aol.com

Paul E Wagner

Brian...I applaud your purpose. That said, your style made reading your letter an effort. I suggest you ask an editor for some assistance. A couple of suggestions: 1. consider beginning the second paragraph of your letter with the essence of what you wrote as the last paragraph of your draft.
2. Consider avoiding beginning sentences with "That" 3. I find bulleting key points to facilitate comprehension.

Paul Wagner

Guest

Brian,
Your letter was very informative, since I was unaware of the Regulation Best Interest proposal. My sense, however, is that this proposal "muddies the water" rather than clarifies the Advisor's dusty to his client and will make it more difficult for investors, who suffer harm from unscrupulous advisors, to obtain relief. My guess is that this proposal was drafted (in whole or in part) behind the scenes by the financial services industry's lawyers.
I still believe that the "right answer" is to hold everyone that works in the financial services industry to the Fiduciary Rule, as most (uniformed) investors believe already happens.
Craig Howard

Guest

A few comments regarding your letter and on a couple of the comment letters. This is a complicated issue. My fear is that the more detailed any regulation is, the more the regulator is crossing over into the realm of dictating proper investment policy. I lived through the 90' when "active" was a bad word. Now the SEC finally addresses "negative churning". 401k sponsors are already moving into lowest fee mutual fund offerings assuming a safe haven. Sometimes to the detriment of performance.

You argue in favor of hourly fees or retainers vs % of AUM. In the context of your description of fee-based advising, I couldn't agree more. Back in the early '90's when I adopted a predominately fee-based (AUM) model, I spoke out continuously against the idea of a fee-based AUM model for a "buy and hold" strategy. I couldn't get anyone to listen. Now 25 years later, the SEC is addressing the issue that they term as "negative churning". Commission, hourly or retainer is certainly more appropriate if the "advisor" is simply buying and holding a portfolio.

However, there are a number of independent advisors, like myself who see their role as asset manager not a financial planner, wealth manager or consultant. In my practice, I manage client assets. I spend the bulk of my day doing research, I pay substantial monthly/quarterly/annual payments for research and data services such as yours. I use models based on well documented and researched strategies across my accounts, so that an hour spent on research benefits the bulk of my clients directly. To argue against an AUM fee model in my case would be to argue against an AUM model for mutual funds, ETF's, SMA managers etc.

My point is that how an advisor charges should be a function of the work done for the client. In the right situation, AUM billing is appropriate and fair. Going to hourly or even a retainer would add a layer of administration and cost to my business that would ultimately be passed on to my clients. A $100 extra here and there doesn't matter much to a million dollar account but adds up to a $10,000 account. Your support of hourly billing would truly reverse a trend in cost efficiency that allows me to bring in new investors and offer the same portfolio management offered to the larger established investor accounts. The hourly billing works for attorneies? My gawd, I can't imagine tracking every copy, paper clip and phone call to maintain accurate billing!

You also mention a tracking system like Morningstar for advisors. Please reconsider that statement! While Morningstar has done a lot of good they've also done a great deal of harm to investors' net worth. They single-handedly turned the focus of defining "good" vs "bad" (inadvertently maybe) into a star based system that by their own admission shows a modest negative correlation to future performance. The investor needs to be educated on risk as much as or more than reward. A performance-based database will just lead to more harmful benchmarking like today's infatuation with the S&P 500. Over the last 17 years the S&P 500 has lost half an investors wealth twice....all for about a 6% average annual return. This is a goal to aspire too? That is a horrible risk/reward ratio.

Finally, and maybe the only point that really matters - what independent advisors want is a level playing field. The billing system shouldn't determine whether an advisor acts in his clients best interest or not. I have yet to meet a single consumer that has any sort of clue that brokers and advisors are held to different regulatory standards. Regulation could take one of two paths. If it is financially advantageous to the Rep to invest a client's assets in one product vs another than they cannot use the title of advisor. They are salespeople. Or hold all Reps to the exact same standard so the consumer knows and understands that they can seek advice from any type of firm and expect to be treated the same regardless of compensation.

Bill DeShurko

Mike Russo (WYOMISSING)

"However, there are a number of independent advisors, like myself who see their role as asset manager not a financial planner, wealth manager or consultant. In my practice, I manage client assets. I spend the bulk of my day doing research, I pay substantial monthly/quarterly/annual payments for research and data services such as yours. I use models based on well documented and researched strategies across my accounts, so that an hour spent on research benefits the bulk of my clients directly. To argue against an AUM fee model in my case would be to argue against an AUM model for mutual funds, ETF's, SMA managers etc. "

Well said Bill

Brendan Messenger (Abilene)

To be honest, I'm in favor of anything that shows clients what they are paying. As a CFP, I'm always in 'full disclosure mode,' so I have to share all that stuff up front and in detail. However, many folks I talk to who don't have their money with me have no clue what they are paying or what they are paying for. I do not agree in totally abandoning the AUM model, as it does allow an advisor to benefit from growing the account and punish them for losing. However, an overall fee assessment for the client to approve is really more of what I'd like to see (advisor fee, fund fee, full disclosure out-the-door pricing). If anything, an annual renewing of the fee structure, by permission, so that the client knows what is going on might be of some benefit. I simply want to see our industry actually work for their pay. It's garbage watching all these dudes buy their massive homes, land, and condos, yet they don't even know a top holding or two from any account they 'advise' on. Thanks, Brian!

Guest

I must say that I wish there was an ideal solution I am 81 years old & have a financial & investing background. I never found an adviser that was as committed as myself & spent many hours getting & subscribing to numerous newsletters. Many turned out to be mediocre but a few like those offered by Valuentum have been well worth the money & I continue to lean on these sources for both Buying & Selling advice. Am getting to the age when I would love to find a professional that would operate under my asset allocation guidelines & stop orders
My big grouse is DISCLOSURE OF ALL RELATED INVESTMENT COSTS.
Most times you have to dig this info out with a pick ax & even then you find surprises when your broker (a Bank) charges you for switching an account from automatic dividend Investing to leaving idividends in cash until a specific investment opportunity arises & vice versa Thanks Roger Adcock

Darian Cohen (Oak Park)

Brian,
There is no perfect solution. Part of the role of advisors (no matter how they are paid) is to help investors make good decisions, and, perhaps more important, keep them from making bad decisions. There is potential for abuse in all fee structures. For instance, does it make any sense for a client to pay a large advisory fee or on going asset based fee for a buy and hold investment like a municipal bond? I think the industry should focus on advisor education regarding investments rather than rules and regulations. All the basic licenses and continuing education focus on rules and little to none on how to help people invest their money.

Darian Cohen

Michael Victory (Cleburne)

FEAR OF BILLING & OVER-BILLING:
Clients are afraid to talk to their FA who charges by the hour, just like they are afraid to talk to their lawyer. I charge by AUM and for the most part it is appropriate - people with higher AUM have more complex planning needs. It's true that large accounts are more profitable, but there's nothing new about the rich paying more, such as higher marginal tax brackets. They subsidize the middle class accounts.

Charging by the hour increases the overhead considerably. The time an FA would spend billing clients would have to be (you guessed it!) billed to the clients. When an FA works on something for 15 minutes (s)he probably has to bill the client 30 minutes, just like lawyers do!

Fear of hourly billing will eliminate most of the sub-$500,000 accounts, just like most middle-class people do not have an attorney.

RELATIONSHIP & EXTRAS:
What about all the extras that FA's do to build the relationship? Nobody is going to pay $300+ per hour for that, yet it is essential for building the client relationship to earn trust and referrals. Clients value having an all-inclusive package. Should we also propose eliminating all-inclusive resorts because some people eat and drink more than others?

CONFLICTS:
There is no perfect solution. All 3 methods of billing have
their own conflicts:
1. Commissions or transaction conflict -- Encourages churning and non-transparent commissions.
2. AUM-based conflict -- Encourages reverse churning, overcharging large accounts, undercharging small accounts, and service level often different for same revenue.
3. Hourly conflict -- Encourages over-billing, creates extra overhead that further contributes to over-billing.

OTHER THOUGHTS:
I share the common opinion that the AUM fee scales too slowly at many firms. For example, I know of a Merrill Lynch client who pays 1.0% on 5 accounts totaling 3.5MM. But why are all these fee conversations treating AUM-based advisors like dishonest crooks if the fee is properly disclosed? Why not let the free-market decide which way clients want to be charged?

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