The investment advisory business has changed drastically over the last several decades. Advances in technology have made it possible for investors to access very low-cost portfolios through robo-advisors, and changes in regulations have made even complex instruments – such as alternatives – available on exchanges.
On the planning side, the rise of independent, fee-only financial advisors has created a model where comprehensive financial advice is now available to anyone. The fiduciary standard ensures that advisors have to put their clients’ best interests first.
These are all good changes, but we think there’s still room for improvement. Lives are more complicated now, and the financial journey has become more individualized. Careers look different, compensation has evolved, and retirement certainly isn’t the simple time it once was.
In our view, compensation should be based on complexity – not on asset level. The extended bull market certainly bears out the truth of that observation. Why should fees go up when it’s the market, not the advice, driving the gains?
We get into the details of our model in this short read.
A Brief History of Advisor Fees
Let’s start with some classic literature. In The Great Gatsby, the narrator Nick Carroway sets the action in motion with his decision to “go East and learn the bond business. Everybody I knew was in the bond business, so I supposed it could support one more single man.”
What does this have to do with investment advice? Bonds were sold on commission, and you didn’t have to know anything about them – or your client– to be successful. This unfortunately became, and largely still is, the model for Wall Street firms. Brokers sell on commission, and what they sell is usually the most profitable product for the firms they work for.
An Evolving Paradigm
The fee-only, fiduciary financial advisory model is a huge step forward for the industry and for the investors it serves. The onus for recommending an appropriate product is squarely on the advisor, and conflicts of interest are not allowed and must be disclosed.
Products still carry fees, of course, but lower-cost financial products like ETFs and Mutual funds make it possible to construct a portfolio that delivers quality investments. The advisor fee is separate from the product, and the advisor is paid for their skill in constructing the portfolio.
Taking It a Step Further – The Tech Matters
The same revolution in technology that makes it possible for you to download an app to manage your budget or get a mortgage on your cell phone has streamlined the work of advisors, too. Thinking about risk, constructing a plan, coordinating different asset streams and factoring in future-based changes or goals is no longer an hours-long process that involves collating statements and creating complicated excel spreadsheets. For an advisor who invests in the best technology, the process is more precise, can happen in real time, and can even be collaborative with clients as they think through various possible scenarios.
Tech has moved everything forward, and the advisory compensation structure has not kept up.
Counting in Complexity
This is where it gets real for us. We believe that our value is in working with our clients on their specific situations. Software is great, but it can’t think through the implications of equity compensation for you. It can’t tell you whether you should buy into a medical practice – or sell out of one. It can’t build a retirement plan that is flexible enough to let you travel extensively and still leave the legacy you want.
This is our fundamental difference. We don’t think it’s fair to get paid a percentage of the client assets we manage. We also don’t think it’s fair to charge the same fee for someone who has a straightforward compensation structure or needs only minimal help in creating a retirement income stream, that we would charge for more complicated situations or more extensive planning.
We have model that provides the advice you need, at a fee that makes sense. It’s so simple.
The Bottom Line
Investors today understand that they have choices when it comes to their financial planning journey. The life stage you are at, the goals you’ve set for yourself, and your own vision for the future should guide the choices you make. A good plan can make all that clearer and put you on a path to success – and it should come at a fair price.
At Columbus Street Financial Planning, we want to understand your goals and values and help you make well-informed investment decisions to put you on the path to retirement success. So schedule a call with us today.