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Dear Medical Executive-Post
This is an excellent communications forum and blog; I tell all my friends about it. So, here is my dilemma.
The Problem?
My financial planner charges me a percentage of assets-under-management. He explained that in this way we are both on the “same side of the economic table”, with aligned interests. It all sounded good at first; but now I am wondering after doing some research and readings?
For example:
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Doesn’t this produce an “equity bias”, as he earns more income with equities than cash or bonds? This seems especially problematic with automated DRIP programs that don’t produce cash for purchases during market price downturns, but seem to constantly buy-up; at least 2/3 of the time according to my readings.
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Why can’t I pay a percentage of the assets he “grows” for me, rather than on the assets I have already amassed myself – without his help, or brought in from elsewhere? And, why pay if he looses money?
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Is it true that my account is just bundled and outsourced with many other similar accounts, and is not really specific for me at all? Of course, this probably does reduce his risk by remaining within the “standard of care” for his industry. But, common industry practice doesn’t mean it’s good for me. And, why do I have to sign a brokerage arbitration agreement? Why is he not a fiduciary like my CPA and attorney?
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What is the deal with all these meetings and client engagements that don’t seem to add any value? And, he doesn’t seem interested in financial planning at all, despite being a “financial planner.” My other concerns are glossed-over, and then he just recommends I see an “expert”, when pressed.
Assessment
Is it time for me to “do-it-myself”; and go to a passive investment management style, use index funds or ETFs, and be done with it all? This strategy sure seems a lot cheaper. Of course, I fear my “doubts” will affect our relationship.
Conclusion
Am I wrong, or right? The more I investigate and learn about all these industry practices, the more concerned I have become. Any thoughts are appreciated? Yet, maybe I don’t really have a problem at all!
Nevertheless, where does a doctor (or anyone else for that matter) go for “honest advice”?
PS: Your books are excellent sources, but I still need some help with execution.
Thank you.
Dr. Mark-Me Anonymous
[Washington, DC]
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Filed under: "Ask-an-Advisor" | Tagged: Ask a Consultant |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Medical Executive-Post,
I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.
Sue
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The Conflicted AUM Fee-Corollary
The Assets Under Management [AUM] fee system of charging clients based on the amount of assets under management is flawed for the financial advisor.
Why; because it often forces clients with simple lives to pay more for services, than those with more complex financial affairs.
The Assets Under Management [AUM] fee system of charging clients assets on the amount of assets under management is also flawed for the client.
Why; because advisors often take more risks than necessary in order to maintain income levels, with a risk-reward ratio heavily against the client as they are “decidedly-not on the same-side-of-the-table.”
And so, what is the answer to this opposing situation; client versus advisor? Your comments are appreciated.
-Michael
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AUM Model
It can be flawed for the client and it can be flawed to the advisor. But it isn’t necessarily flawed for either. Your premise is that complex/large clients require more attention. Sometimes yes, sometimes no. My experience is that most times, a small account requires just as much attention as a larger one, but the larger one generates a lot more revenue. That’s a generalization.
But here’s my big point, often missed in this and other discussions. The Assets Under Management (AUM) model rises from a fiduciary standard. It’s a stewardship model. It’s not appropriate to compare it to other investment management because it involves a much higher standard.
As a fiduciary – a Registered Investment Advisor or trust company – you are asking us to accept responsibility for your portfolio. Both moral and legal responsibility. We are accepting a requirement to act in your best interest and engage our professional knowledge, experience, and judgment on your behalf. We employ detailed processes, procedures, and systems to design, implement, and evaluate your investments. We are not selling you a product or products. We are buying them on your behalf. It’s a completely different paradigm.
Imagine for a minute that you will accept this same kind of responsibility in caring for someone’s home. They ask you to accept moral and legal responsibility for all their property and possessions (this concept of stewardship hails all the way back into Biblical times). They’ll pay you a fair stipend each year for accepting this responsibility. Of course, you are also accepting some liability including their potential claims if you fail to perform responsibly. Let’s say you agree to do this for $5,000 this year.
For that $5,000, you agree to arrange care and maintenance of their property. Lawn care, gardening, utility payments, taxes, insurance, and routine expenses. A tree falls, and you arrange for it to be removed. A window breaks, bats get in, and you call the exterminator and window repair company. The owner pays for these services, but you make sure they are done right and that the property stays immaculate. And if one of the vendors fails to perform or steals a painting off the wall, both he and you might be sued! No worries, you think, I’ll accept that risk for $5,000 per year.
So how much should you charge for the 500-acre estate down the street? Your duties and responsibilities are roughly the same, but the ramifications are so much larger. There’s a swimming pool, farming operation, equipment, and employees. There’s a security operation and 24/7 monitoring. And – this is important – the potential lawsuits are larger by a factor of 10 or 15 times!
In other words, the larger estate commands a much bigger responsibility even if the duties are similar! Even if they take a similar amount of time each week. It’s not the time that matters, it’s the amount of responsibility with additional specialized knowledge, experience, and judgment.
The difference is fiduciary responsibility. The lawn service mowing both yards charges based on the size of the lawns. The agent selling insurance simply collects data and forwards it to the insurance company; he collects a premium and moves on. Those are project work, not ongoing responsibilities. AUM fees acknowledge this vast difference.
Dan Danford
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Dan,
Many thanks for your experienced, reasoned and logical thoughts; ceteris paribus [all things being equal]. But, they are not.
WHY? TAMPS have virtually outsourced your hard working model to a one-size fits all and automated experience.
It converts managed accounts to a virtual annuity and cash flow machine for the advisor. Now, it does promote a long tern approach to investing but under the metaphorical guise of a [“heads I win – tails you lose?] b-model favoring the advisor.
Hence, I do struggle with payment approaches since none are perfect; even for my core expertise in medicine. Perhaps the hedge funs have it right! P4P.
Fraternally.
Dr. David Edward Marcinko MBA CMP®
http://www.CertifiedMedicalPlanner.org
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AUMs @ 1%
One-third and up to one-half of investor gains is absorbed by fees. The “money guys” take zero risk (it’s not their money, it’s yours) but nevertheless get a huge reward.
Dr. David Edward Marcinko MBA CMP®
http://www.CertifiedMedicalPlanner.org
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You need better “money guys.” It’s wrong to make general statements. There are better/worse professionals and better/worse companies. Check out NAPFA and the new CFP guidelines. You may be a competent D-I-Yer, but that’s certainly not universal.
Dan Danford
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