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What People Will Pay For

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  • What People Will Pay For

    As some further comment on my prior posts-that there are many physicians (and others) that are not like the typical reader of this forum.  Planner Josh Brown elaborates on what we experience as planners with the "average" client.

    What People Will Pay For

    The world’s first financial advisor is Joseph, son of Jacob. He is doing asset management for the Egyptian Pharaoh and he also kind of invents the very first national pension system.

    Pharaoh’s assets are the lands themselves and the agricultural crop that can be produced from them. He is having nightmares about seven fat cows and then seven lean cows. Jacob, a prisoner at first, interprets these dreams to mean that seven bountiful years are coming but they will be followed by seven years of famine and pain.

    Pharaoh appoints him as his financial advisor and allows him to commandeer a fifth of every Egyptian farmer’s harvest to comprise an emergency store of grain. When the famine begins, Pharaoh’s got the resources saved up to continue feeding his people, sort of like social security for citizens who are no longer able to earn a living. Joseph is paid in return for his advice to the ruler and his country – the Pharaoh tells him to send for his entire family and tribe of Jews from Canaan and to bring them to Egypt to settle.

    Joseph guided the Pharaoh’s portfolio and saved his assets from ruin. In exchange for his crucial advice, he was paid an asset-based fee – a portion of the farmland.


    As of August 1st, my firm’s tactical asset allocation portfolio, called Goaltender, has been 100% invested in US stocks for 25 straight months without interruption. Let me repeat that. This particular strategy has now gone 25 straight months of being 100% long US stocks. We take zero credit for having seen the any of the recent bull market coming in advance, as Goaltender is entirely rules-based and our own feelings do not enter into its allocation decisions.

    We almost never discuss our tactical asset allocation strategies publicly (two rare exceptions here and here) and even in this case I won’t be (can’t be) getting into any details. But there’s a bigger point I want to make here…

    First, some rhetorical questions:
    How many other tactical strategies out there have been fully invested in US stocks since July of 2016 without any hedges or sales or “swings to cash” during that period?

    How many investors would have run a strategy like this for themselves and stuck with it the entire time?

    How many professionals can set up a rules-based strategy and then actually stick with it without making tweaks and changes?

    How many tactical strategies were built from the premise of “how can we trade the absolute least amount of times each year and almost never do anything, yet still be considered tactical?”

    Goaltender is the only tactical strategy I’m aware of that was built internally at a wealth management firm with the express purpose of managing investor behavior rather than trying to outsmart the markets, generate alpha or call tops and bottoms. Almost every tactical strategy we’ve seen in the wild is oriented toward impressing people, beating markets, making rapid moves and incorporating economic data, sentiment surveys, fundamentals and other bulls*** that doesn’t actually work.

    Ours is designed to make the trade that clients can’t, at the moment they can’t. The trades they won’t make themselves. If we called clients a week after Brexit at the beginning of July 2016, with the controversial US election looming just a few months ahead, and said “We want you to go 100% long US stocks right here, right now, and hold them for the next two years straight, no questions asked,” the response would not have been great. Which is why we are discretionary managers, running these strategies ourselves.


    There are several reasons why financial advisors overwhelmingly charge clients for their services as a basis point fee on assets as opposed to hourly or on a monthly retainer.

    One of the major reasons is that, at the end of the day, the financial advisor is going to be held responsible for what happens with the client’s invested assets, regardless of whether or not the value-add on an ongoing basis is perceived to be the asset management or the financial planning work.

    It’s also possible to say that during 300 days a year it’s the planning work that is worth the most to the client but during the other 65 days a year, it’s the asset management that’s going to make the difference. We don’t know in advance which days will be the 300 and which will be the 65. The thing is, what goes on during those 65 days might have tremendous implications for the financial plan – positive or negative.

    You’re welcome to hold yourself out to clients as a financial planner, but the truth is that they’re going to judge you on the portfolio you recommend. Even if you don’t manage it yourself and turn it over to a TAMP. Even if you just default to a five-ETF portfolio using all Vanguard. Even if you recommend seven mutual funds and never make a change. Even if you charge solely for financial planning hours and do the asset management part for free. When all is said and done, you’re going to keep or lose a client based on that asset management someday, and you’re going to have to discuss it throughout the year come bull markets or bear. You’re going to have to defend it at times when markets prove unfavorable to how you’re allocated. You’re going to have to defend it in light of underperformance or whenever some hot, new idea comes along that clients want to compare with what you’re doing.

    You may as well be paid for it.


    As a financial advisor, you will own the asset allocation more than anything else, even if the personal relationship and the planning piece is a lot more meaningful than the fund selection.

    This is regardless of what kind of people your clients are, what region of the country you serve, which type of firm you work at. That’s also your biggest risk – that someone is furious about how their assets have been allocated. Shouldn’t everyone in every profession be paid based on the thing that is their biggest risk? Why would a client want it otherwise? They’re handing you their money to invest in the portfolio that you recommend. If you do a bad job, they’re taking the money out of the portfolio you recommend. You have skin in the game now, in a way a retainer fee simply doesn’t capture. This is actually what clients want. The best evidence of that is the incredible shift in investable assets away from almost every other channel of wealth management directed straight into the RIA channel.

    There are now 18,800 retail-focused (Registered Investment Advisory) RIA firms in America. 687 of them manage over a billion dollars and account for 60% of the industry’s total assets under management. These firms are the future. Trillions of dollars have moved to the RIA space. None of it at gunpoint, that I’m aware of.

    People are voting with their dollars and their vote is for asset based fees in exchange for a relationship with a financial advisor who manages their portfolio.


    I didn’t make it this way, I’m just telling you how it works in the real world. I’m sorry if this doesn’t align with how you feel it should be or what logic would dictate. Twenty one years in the game, my friends. When I see a reporter or a columnist opine on the compensation structure of financial advisors, I read it with an open mind. Perhaps there’s some merit to what they’re saying in some cases.

    But then I remember that a true financial advisor doesn’t really earn their fees until the big moment. That moment where a client wants to double their exposure to technology stocks after a 500% rally they feel they didn’t get enough out of. That moment where someone with a thirty year retirement ahead of them is about to succumb to volatility and liquidate a stock portfolio after 8 months of a bear market. That moment where a client wants to shift to an all US stock portfolio precisely as international stocks are on the verge of going on a five year stretch of massive outperformance. That moment when a client is tempted to put five percent of their net worth into Bitcoin at $18,000 per…whatever, coin I guess?

    And when these moments happen, the advice they get at that time is not simply worth a basis point fee. It’s worth everything. It could be worth a lifetime’s sanity every day thereafter. I’ve seen decisions made and consequences suffered the likes of which you couldn’t imagine. Between 2010 and 2015, we would come across at least one or two investors a week who had been miserably sitting in cash since 2008 and didn’t know what to do. None of these cases involved a client who had an advisor currently working with them. Hundreds of thousands of dollars in foregone gains (in some cases millions) had been left on the table due directly to the absence of professional help.

    For those who have never been on the phone with a client – a human being – whose liquid assets and entire life savings are in a twenty percent drawdown, alarm bells ringing throughout the media and blood-red stock quotes everywhere they look, you really have no idea what fee is worth what amount, to whom, and why. If you’ve never sat with someone who is so utterly convinced that their family’s future and their freedom is slipping away before their very eyes, you probably don’t need to have a strong opinion about what they should or should not be willing to pay for help.


    And for those who don’t understand why the financial planning work and the asset management work that advisors do are inextricably linked – why they are not merely a la carte items on a buffet’s steamer table, ready to be unbundled and consumed separately, in any particular order – I don’t know what to tell you.

    I’m not sure how you can invest someone’s entire life savings without understanding how and when the money is ultimately going to be used. I’m not sure how you can construct a financial plan for someone and then act as though the way they reach their goals via the investment markets is somehow less relevant or worthy of attention.

    Financial planning in the absence of an investment strategy designed to implement the plan is a f***ing fortune cookie. An investment portfolio absent the dictates of the goals from a financial plan is like building a house without a blueprint. Neither or these things is worth much without the other. But delivered in concert, they are essential and worthy of a fee for the people who are going to be overseeing both.


    We don’t take requests. We’re not the wedding DJ.

    People come to us and tell us what they want (or what they think they want) and it’s our job to show them what they actually need instead. If we’re talking to someone rational and intelligent, they get it immediately.

    They’re relieved to be told what they should be doing rather than being presented with a menu of options. They’re excited about a future in which they can tune out virtually everything and focus solely on spending the money they’ve saved based on what’s important to them. They like having their financial information organized and presented in a way that illustrates possibilities and priorities. They like the peace of mind knowing that they’re making ongoing decisions in consultation with an advisor who understands their personalities, their spending needs, their tax situation, insurance coverage, estate plan and their future hopes and dreams. They also like having someone else be partly responsible for the burdens of investing large sums of money on behalf of other members of their family. The planning and the investing functions are integral to all of this value being created and enjoyed.

    This is why the wealthiest, most successful people in America are working with wealth management firms and paying an asset based fee. It’s why they always have and they always will. Gladly.


  • #2
    I see many colleagues who pay from normal to outrageous fees to planners since they are plainly not interested in looking after their finances themselves for whatever reason. Each his own. As far as this comparison with Joseph, of note is that Joseph was handsomely rewarded AFTER he had produced a good outcome for the pharaoh. From the story, he apparently did not charge an expensive AUM fee.


    • #3
      By my reading, Joseph wasn't the first:

      Gen 31:1- "...Laban's sons were saying, 'Jacob has taken everything our father owned and has gained all his wealth from what belonged to our father...'"


      • #4
        For those who are likely to buy the hottest stock, sell during a bear market, and overthink themselves into a financial meltdown then a modest 1% AUM fee is certainly worth it. I don't think anyone in the WCI network would say otherwise. However if you can educate yourself and stick with a reasonable buy and hold investment strategy and come to a forum like this for a little hand holding when needed you will be better off in the long run.


        • #5


          • #6
            "This is why the wealthiest, most successful people in America are working with wealth management firms and paying an asset based fee."

            You mean like all the athletes and celebrities I read about all the time that are bilked of millions by their 'wealth managers' and 'financial advisors'? Or just the average HNW client of Wells Fargo Wealth management who got to pay millions in fees so their 'advisors' could hit bonus targets while their accounts were stuffed with poorly performing assets in the ironically named Investment Fiduciary Services? Or just the average Joe with who was led astray by his Edward Jones 'advisor' and had his account churned with high-load mutual funds to further enhance the AUM collected by the advisor?

            "How many investors would have run a strategy (100% long US equities) like this for themselves and stuck with it the entire time?"

            Uhhh..from prior posts, plenty of people on this forum ran with a similar strategy. That's not exactly earth shattering in present day investing. The wisdom of it can be debated, but for that guy to act like it was a superhuman feat is a bit of an oversell.

            "One of the major reasons is that, at the end of the day, the financial advisor is going to be held responsible for what happens with the client’s invested assets,"

            If they were truly held financially responsible for their performance, that'd be a whole different ballgame. But they're not. Sure, if they suck, they may lose business, but plenty of them that suck maintain billions in AUM. That's rapidly changing as there have been huge flows from active to passive over the last several years, so I presume we'll continue to get to read more shameless marketing like this. If they're good enough to reliably beat some sort of indexed metric, then they should put their money where their mouth is and be 'responsible' for what happens with the client's assets. Beat a chosen index by more than 50 basis points over a rolling three year period...share in half the gains beyond that. If their 'strategies' are really so advantageous, that's an easy deal to make, no?

            And the Joseph comparison is terrible. Per the story, he was a central planning autocrat who taxed the people. By that logic, we should do away with 'wealth managers' completely and just expand social security. But I'm guessing that's not the angle you're looking to take.





            • #7
              Two comments:

              1. “Tactical strategy” seems to me like just another way to say “active management.” Who wrote the “rules” for the strategy?

              2. He’s basically saying that an investor that’s able to choose an appropriate allocation and stay the course doesn’t need his services.


              • #8

                Click to expand...

                Good choice, you didn't miss anything.

                Can I have my 5 minutes back?


                • #9
                  Was this a defense of AUM fees? Is there some reason that same service can't be given for a flat annual fee? Did I miss something in between all the Biblical references?

                  As far as tactical asset allocation, it's a lot like active management. Somebody will get lucky. Is two years really a long enough period to separate skill from luck? Probably not. If you want a cheap, effective, tactical asset allocation strategy, choose a simple trend following solution. Otherwise, do what I do - maintain a static asset allocation long-term. It even works in nasty bear markets if you have a reasonable amount of discipline.
                  Helping those who wear the white coat get a fair shake on Wall Street since 2011


                  • #10

                    Click to expand…

                    Good choice, you didn’t miss anything.

                    Can I have my 5 minutes back?
                    Click to expand...

                    Somehow, I previously read it from Twitter.

                    The analogy does not hold up well. If Joseph were wrong, he would have lost his head in short order. Can we have our financial advisors executed if they lose our money?

                    (just kidding, of course!)


                    • #11
                      At the end of the long article I still did not get the gist of what the author was trying to convey.

                      If the average client wants to pay AUM for their services, more power to them and Mr. Joshua Brown. But count me out of this strategy.


                      • #12
                        Why is it that only financial advisers and realtors have the right to charge aum's?


                        • #13
                          Wow, much longer than I thought. The gist of it I got is that you should pay based on AUM because that way they have skin in the game. The more you make, the more they make.

                          Buuttt, the problem with that is that even when I'm losing, they're winning. If I go down 20% on my portfolio, they'll still take their fee. Yes, the fee will be smaller, but they won't starve. But I just lost 20% (plus their fee, so 22%?).

                          Ultimately, I second ZZZ's suggestion: Ideally, they'd get paid out of the winnings. So if my portfolio magically does 10% better than the S&P500? Sure, take half of the difference... based on the delta between the S&P and the portfolio you managed for me. If my portfolio does worse than the S&P 500? Ideally you'd mitigate your mistakes by giving me some money, but at a minimum the fees should be zero -- after all, you just learned a great lesson on what not to do using my money.

                          Overall, not a fan.


                          • #14
                            If spending money would make me more money than I'd make myself, I'll pay the money. With regards to my investment portfolio, that's unlikely, so I don't.


                            • #15
                              I was going to Title Mr. Brown’s post: ‘In defense of AUM’

                              Though I find overall article self-serving towards AUM.  The ‘skin in the game’ of AUM is an overstatement on both sides.   For a 1 million portfolio and a 1% AUM and baseline one year 7% increase.  AUM at base case (YE): $10,700; AUM with additional 10% outperformance (over base): $10,770; AUM with additional 10 underperformance (from base): $10,630.  Punchline- AUM difference is $130 over a year, not exactly an incentive.   This also illustrates why only paying for ‘overperformance’ is a problem, insufficient incentive unless significant risk is added.  ‘If you do a bad job, they’re taking money out of the portfolio you recommend’. You can spin it any way you want, but a AUM portfolio is sticky like a bank account.  Because a client wants to pull money out does not mean it will either a. be easy, b. be cost efficient, or c. allow the ‘advisor’ to talk and change a person’s mind (all whole life insurance comes to my mind on C.).  It’s a numbers game and all AUM advisors play it.

                              There article does make several valid (IMO) points made including:

                              ‘As a financial advisor, you will own the asset allocation more than anything else, even if the personal relationship and the planning piece is a lot more meaningful than the fund selection’

                              ‘People come to us and tell us what they want (or what they think they want) and it’s our job to show them what they actually need instead’