Returns, Fees and Services. Oh My!

Ah, it’s that most wonderful time of the year. Cooler days, trees turning color, prepping for the holidays and I am being inundated by emails, calls and LinkedIn messages from “business coaches” who are going to help me. That help will be “getting to the next level/breaking through/living the life I want/etc.”

Now, I try not to share too much behind-the-scenes stuff with you because no one cares how the sausage is made in the world that is financial advising. However, a recurring theme caught my attention and I have to share some quick thoughts. But it has nothing to do with coaching. Please stay with me.

Personally, I don’t mind the constant emails from these coaches. They are in sales and this is the time when businesses are figuring out marketing/growth plans and budgets for the next year. You have to strike while the iron is hot, right. The issue is I think some of their messaging could be better.

The part I am referring to is many of the messages talk about how some of the people they have coached have seen increases of revenue close to 100% the last 5 years and nearly 50% the last two. Those are tremendous numbers. Now, knowing that nearly every advisor out there charges a fee based on the assets they managed, what we call an AUM model, I decided to do some quick analytical work. This was because I know the market has done very well the last five years, but I wanted to know more.

The analytical work was simple. What has a 60/40 portfolio (60% in the S&P500 and 40% in an Aggregate Bond Fund) done over the last few years? Well, since the beginning of 2017 and through almost all of October 2021, this 60/40 is up just over 80%. More impressive is since the beginning of last year this simple portfolio is up 30%. That is even with the giant drop early in 2020 due to Covid.

If you regularly read my stuff, you probably know where I am going. It has to do with fees clients pay under the AUM model and the value of the services they receive.

Let’s look at a quick example. Assume your advisor is managing $1 million for you. And they charge you 1%, which is the average AUM advisor fee. This means you pay them $10,000 a year for their investment management services. And many of these AUM advisors only manage money. They don’t do things like financial planning, analyze taxes, review workplace benefits, discuss estate planning, and more. You know, some of the stuff I do with clients.

Now, if that $1 million has grown to $1.8 million over the last five years, you may now be paying your advisor $18,000. Almost double what you were paying them a few years back. Again, I get the thought that they have “skin in the game.” This is the concept that if your portfolios go down they get paid less too. Except in 2020 when they were given forgivable loans when their revenues dropped, but I digress.

The question I like to ask is – If your portfolio has doubled and the fees you are paying your advisor have doubled, has the service they are providing to you doubled?

This is a legitimate question for you to ask. Many advisors have increased the services they provide and the value they bring. That’s many, but not all. I think it is worth you checking to make sure you are comfortable with the fee you are paying. Basically, only you can answer whether the services you receive are worth the increasing fees you continue to pay.

I regularly get asked what services I provide with my flat fee and never have a problem answering it.  As far as I know I am the only true flat-fee CFP® in Ohio. I charge based on my experience and the knowledge I bring to clients. My fees are not based on what commissionable products are sold nor on what the market does, which is outside of any advisor’s control.

It’s a model that works for me and my clients, but what do I know as a lowly CFP®. Oh, if you’re wondering, my growth this year has been nearly double my goal for 2021. And all without charging AUM fees. Apparently, my model makes sense for more people than I thought. And if you want to see what I provide for my fee, just shoot me an email.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.