Beware Rising Investment Advisor Fees

A few weeks ago, Wealthfront’s VP of Research, Jeff Rosenberger, PhD, clipped a story from an industry trade magazine, titled Five Ways for Financial Advisors To Raise Fees, and hung it up in Wealthfront’s Palo Alto office. We have to admit, it was subject to grafitti.

Our team found the article funny. We were in the midst of an effort to lower fees on investment management – and here was an article offering financial advisors strategies for milking their customers.

Not only are the traditional financial advisors looking to increase their fees, they are trying to charge more for what is too often bad service. According to an industry report last spring, financial advisors charge an average of 1.32% annually on the assets they manage. On a $250,000 account, that’s $3,300 a year.

And for what do most of them charge? Holding your hand, putting you into a pro forma 80/20 stocks/bonds allocation and dropping your money into expensive mutual funds that may even offer the financial advisors kickbacks on your investments? (See our 10 Signs of a Bad Investment Advisor.)

We are not the only ones thinking there’s room for improvement in this industry. Famed behavioral economist Dan Ariely recently wrote about this topic on his blog:

“Moving money around from stocks to bonds or vice versa is just not something for which we should pay one percent of assets under management,” he wrote. Passionate about behavioral economics, Ariely’s blog post also raised questions about how accurately most financial advisors evaluate risk.

The report on how much financial advisors charge in fees was published by a company called PriceMetrix. The report noted the wide variation in financial advisors’ pricing: 25% charge more than 1.75%, and 25% charge less than 1.01%. The report didn’t find any evidence of competitive pressure working in the marketplace. Some in the financial advisor business and the industry that surrounds it interpret the range of pricing as a sign that the less-expensive financial advisors have room to charge higher fees.

“Clearly, there is no equilibrium price being set by competitive forces here. We believe this wide range of pricing exists because financial advisors lack any credible reference to consider when setting price,” said the report.

We interpret the report much differently. We believe the high and all-over-the-map pricing means clients lack the information they need to make good investment decisions, or familiarity with low fee options. They’ve been confused, perhaps deliberately,  into thinking that financial services firms work differently than other businesses.

Not so.

Just as with any purchasing decision, clients should look critically at the service of financial advice, compare the different service providers in the market, and then make a decision about what the service is worth. The founder of Vanguard, John Bogle, estimates that financial intermediaries, including money managers and investment advisors, take about 2.5% of the returns on Americans’ investments – the equivalent of about $528 billion in 2007.

Some of those billions of dollars are yours. Are you satisfied with what you’re getting for them?


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