The Other Side of the Equation

I hope by now you’ve seen my fee survey (if not, let me know and I’ll send you a new copy).  But Richard St. John, of St. John & Associates, raises an interesting question.  He notes that his firms fees are high, but he also believes the scope and depth of his services are also higher than average.

Another advisor I talked with at the NAPFA Spring conference told me a client had said, basically, “all you do is manage my assets, and I think I shouldn’t have to pay as much as I do now.”  The advisor printed out all the services he’d provided over the past year from his Junxure CRM program, and it came to 14 pages.

These comments define the missing ingredient in the fee discussion.  We are constantly talking about how a fiduciary standard involves disclosing what we CHARGE with clarity, but THE VALUE WE PROVIDE in return can be very murky—and different for every firm.

How can we segment and disclose services as accurately as we disclose fees?  I think we have to break down the financial planning relationship into parts.  Some advisors will provide the full gamut of services.  Others, only a portion.

We also need to start talking about how to quantify the value of these services, to help make a connection with the fees that are being charged.  And finally, if we can define the services more precisely and articulately, then that will help communicate with prospects what they’re getting in return for their fees.

Here’s what I’ve tentatively come up with so far, along with how quantifiable these things are:

1) Asset management, which means creating the diversified portfolio, rebalancing and harvesting tax losses, determining asset location for tax efficiency purposes and of course selecting the investments based on cost/performance criteria which can vary depending on how confident people are that funds/money managers add value.  This could also involve dynamic allocation, adjusting allocations based on current market conditions.

Value: The additional returns from managing the assets is hard to quantify, but is certainly not more than 1% a year of alpha, and requires an honest benchmark, which is very hard to create.  However, managing client behavior and tax efficiency might generate “advisor alpha” of as much as 3% a year (depending on time period), based on Morningstar research.  And there is evidence that in the decumulation phase, managing the long-term tax rate can add as much as five years to the sufficiency of the retirement portfolio.

2) Procedural financial planning, which means organizing a client’s financial affairs (increasingly in an easily-accessible online vault), determining the optimal risk profile of the portfolio based on the articulation of goals, and creating greater efficiency—that is, saving money on insurance coverages and taxes, and overseeing the actual preparation of taxes.

Value: the tax and insurance savings should be easy to quantify.  The organizational benefits are harder to pin a value on.  And some clients will need more services than others; example: a family that needs a special needs trust and to qualify for government-sponsored services for the disabled child.  Or the owner of a small business who needs advice on setting up a qualified plan and cash flow management.

3) The service element; doing chores that the client would otherwise have to do on his/her own, such as maintaining the organization of the finances, providing reports, monitoring the investments etc.

Value: Whatever the client’s time is worth, multiplied by the number of hours these chores would require for the client (not the advisor) to do.  Comparable example: you could paint your own house, but a professional house painter has better tools, more experience, takes less time and will do a better job—and you can put that time to more rewarding endeavors.

4) The so-called “life planning” element of financial planning, which includes coaching.  This involves helping clients uncover what they really want to accomplish with their one precious life, and creating a roadmap to getting there.  And it involves ongoing coaching and holding accountable, so clients stay focused on their goals when they might otherwise become mired in other less-productive or satisfying activities.  This may also involve collecting as many as 30 interim goals at a time, and then periodically (quarterly?) asking clients about their progress, holding them accountable and helping to smooth the road along the way.  And, of course, planning financially for these goals.

Value: If the clients truly achieve clarity about what they want and, in addition, achieve motivation to get there, then this is incredibly valuable, putting the clients in the upper one tenth of one percent of the population, most of whom are buffeted by events and don’t really know what they want.  The coaching element, and keeping track of goals that have been and are to be achieved in a quarterly statement, is also extremely valuable.

5) Peace of mind.  That is, knowing that nothing is falling through the cracks, that the insurances are paid up and all the accounts are accounted for, that you are not overpaying for coverages and asset management, and that your estate is in order and your spouse will have a knowledgeable resource when you’re gone, and somebody is watching the markets who knows how to respond in the event of a catastrophe—there is certainly psychic value here.

Value:  How to quantify this?

6) Concierge services.  This might involve attending meetings with the estate attorney, handling the paperwork to secure loans or mortgages (or refinancing), helping clients buy cars at the best prices, getting tickets at the clients’ request—and who knows what else?  It might also include hiring somebody to pay bills.  This might also involve helping clients find approprite facilities and services for their aging parents

Value: How to quantify this?

I’m planning to send out a message to my readers, asking them what they think of this list, and if there’s anything they would add to it, or any commentary that would help flesh this out.

If “fiduciary” means disclosing only one side of the cost/benefit equation (the cost), and if the benefits are undisclosed or murky, then that raises a variety of issues.  You can’t really determine whether ANY fee is fair.  And perhaps most importantly, clients are unaware of the value they’re receiving—or don’t have any clarity about the scope of the value they’re receiving.

If you have anything to add to this, clarifying the categories, adding new ones, or doing a better job of quantifying some of the values, I’d be grateful for your feedback. (bob@bobveres.com)