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Have more, pay more


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I was recently speaking with a friend in the business about a prospective client who was referred to him. He was excited to work with this couple whom he knew to be great individuals and good friends of an existing client.In addition, this couple had a investable net worth of more than $10 million. Now, most financial advisors working on a percentage-of-assets model (i.e. a typical 1  fee) would salivate at an opportunity to bill this couple roughly $100,000 per year to provide investment advice.

My friend, however, felt that this figure was wildly unreasonable, given the amount of time, energy and expertise he expected to spend with these clients on an annual basis. He felt that a more reasonable annual fee would be a small fraction of the $100,000 (or 1 ) charge that this couple would be quoted by much of his competition. The maddening part is: my friend felt compelled to possibly charge beyond what he considered reasonable in an effort to be in the same ballpark as other advisors and to not be brushed off as "discount" or a lesser option.

The business of investment advice is a strange one. The leading model of advisor fees results in high net worth investors paying high fees simply based on their ability to pay and not related to the services they receive. An investor with $5 million who meets with his advisor once a year will pay 10 times as much as a demanding investor with $500,000 who sees an advisor every quarter.

Recently, an article was published on the New York Times' website about an investment advisory firm that makes a strong effort to be transparent with clients and prospects regarding all levels of fees. That said, this asset-based fee firm told a hypothetical client with a $10 million portfolio that the firm's fees for portfolio management would be $76,250 per year (and growing as the portfolio grows).

I don't know about you, but for $76,250 a year I would expect a team of J.D.s, CPAs, CFP®s and CFAs to handle all of my legal and financial affairs. I want someone paying my bills, filling out my kid's financial aid applications, negotiating my homeowner's insurance rates and the negotiating to drive down the price of my vacation home. I'd certainly expect more than monthly statements and a one-to-four-times-a-year portfolio review common at most investment firms.

Let's imagine that instead of shopping for a financial advisor, my friend's prospective client was interviewing estate planning attorneys. This couple has no children and plans to spend the bulk of their assets during their lifetime, leaving the balance to a few selected charities. They are not interested in tax-saving strategies that may involve charitable gifts during their lifetime, and their charitable intents at the end of life leave them with no estate tax liability.

Now imagine an estate planning attorney quoting this couple $25,000 for a $4,000 estate plan simply because they have the means to pay. No one could justify this fee! And yet this exact scenario plays out every day in the advisory business.

Let's also suggest that this couple is looking for a CPA to help with annual tax planning. They have no business interests or W-2 income, and most of their taxable income comes from Social Security and a 1099 from their investment portfolio. Can you imagine a CPA quoting them $5,000 for tax prep because they have a $5 million net worth? No! The CPA will estimate the fee based on the actual work that is expected to be done.

Sadly, my industry is a far cry from such reasonable pricing terms, and it seems unlikely that the nature of asset-based fees will change any time soon. Investors interviewing and evaluating investment and financial planning professionals should absolutely question the value of asset-based fees and calculate these fees as an average hourly rate.

Your advisory firm should comfortably answer a question such as "How much time do you expect to spend working with me and my portfolio on an annual basis?" If not, they may be more interested in the revenue your portfolio generates than having an honest conversation about the value a financial professional brings to a relationship.

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James Osborne

James Osborne is a Certified Financial Planner ® professional and President of Bason Asset Management, a Lakewood-based Registered Investment Advisor. He has spent his career in the investment management industry, helping clients manage their portfolios and plan for retirement, legacy and lifetime goals. In addition to the CFP ® professional designation, he has an MBA in Investment Management from the University of Colorado. James has previously instructed CPE courses for the Colorado Society of CPAs. Contact James at james@basonasset.com and learn more at http://www.basonasset.com.

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