I had a problem with my air conditioner. Even though the thermostat was switched to OFF inside, the “engine” outside continued running. I noticed the problem when I heard noise outside the window. I don’t know how long it ran continuously before I noticed, or how much electricity it wasted. I had to turn it off from the breaker panel.
I contacted an HVAC repair service to get it fixed. HVAC repair is in high demand in the summer. In addition to giving me how much he charges for a service call, the HVAC guy also told me I could just bang on the air conditioner box to make it stop. After I turned on the air conditioner from the panel, with just one bang it magically stopped, as the HVAC guy said it would. After that it started and stopped following the thermostat. Problem solved. Life goes on.
The most important piece here is the HVAC guy’s knowledge and experience. Once you know what caused the problem, fixing it is trivial. It would be silly for him to spend one hour on driving to and from my place and 5 seconds on giving it one bang. Another service person would probably do just that in order to justify the fee. If the service person just fixed it, I wouldn’t know how they did it. If the same problem happens in the future I would have to call for service again.
Some HVAC services sell an annual maintenance contract. If you want to treat the air conditioner as a black box you can just get annual maintenance. The air conditioner will run. You won’t have to think about it, ever. This is how some people treat their money. They outsource it to someone to manage so they don’t ever have to think about it. It’s the opposite of choose what you know.
From Commission to Fee-Only
Extending the same you-just-do-it-for-me attitude to money is very dangerous because so many commissioned sales people are out there. They can sell you expensive life insurance, annuities, load funds, non-traded REITs and all kinds of junk (see a long list of the bad and the ugly). That’s why you see the recommendation of going with a fee-only advisor who acts as a fiduciary. These fee-only advisors typically manage your money for a percentage of the asset value.
It works, sort of, except you are paying a very high price for the low-value part — the administrative chores — while not getting much of the most valuable part — the advice. When you see a doctor, you pay the doctor for advice. Once the doctor tells you what pills to take, you can easily take the pills yourself. Imagine how expensive it would be if the doctor also has to come over every day to feed you pills!
Bundling management with advice by an advisor makes it very expensive. Advisors bundle management to make it appear they are doing a lot of work for you. Otherwise they wouldn’t be able to justify their fee. You would have a heart attack if your doctor charges you $10,000 every year for a physical.
The rise of robo-advisors exposed the fact that managing a portfolio costs very little with automation. If you are looking for efficiently distributing your new cash into multiple funds, rebalancing, tax loss harvesting, or withdrawing from your portfolio, a robo-advisor does it beautifully. The problem is it’s sort of backwards. Having a computer spit out an allocation from answers to a few questions hardly counts as advice. There’s so much more to advice than a model portfolio. The robo-advisors really only take away the administrative chores.
Robo-advisors have their place but you are missing the real gem.
From Fee-Only To Advice-Only
Fee-only and fiduciary are good but the fee can still be very expensive. Many fee-only advisors offer advice only as enticement to sell investment management. A doctor who insists on coming over to feed you pills is still acting in your best interest (to make sure you take the right pills on time). It’s the way to go for people who have a lot of money to burn. It’s just not very efficient use of money for the vast majority.
What most people really need is advice-only, not just fee-only. Advice-only means you only pay the advisor for advice. It isolates the most valuable part of managing one’s finances. You pay for advice when you need it, just like seeing a doctor.
Once you get the advice on what to do, doing it is trivial. You can do it by online self-service or through customer service at places where you keep your accounts. You are already paying for their computer systems and customer service. So use them.
If you want to be more hands-off and you don’t mind paying extra for convenience, you can move your money to somewhere that specializes in automation. For example at Motif you can set up your advisor’s recommendation as a motif and buy the whole thing in one shot for $9.95. Adding or withdrawing money every month plus rebalancing it once a year would cost you only $130. If your advisor sets you up on Schwab’s Institutional Intelligent Portfolio, you can buy your advisor’s recommendation and have it automatically rebalanced and tax loss harvested for 0.1% a year.
Separating advice from management gives you the best of both worlds. You can focus on getting the best advice at a price most reasonable to you, similar to how you choose a doctor. You can be sure the advice isn’t conflicted because what you buy is not linked to the advisor at all. If you want to handle the management yourself there is no extra cost, akin to taking pills on your own. If you want automation you can choose the best place for automation based on the services offered. You don’t have to tie automation with advice from their computer.
I still believe the average investor should have a financial advisor. Only that the advisor should be advice-only. It’s the best model for what people really need and want, without the extra baggage of expensive management. Fee-only is no longer enough. Go for advice-only.
I Help You Find Them
Advice-only advisors are not easy to find. If you are interested in working with one, I can help you find one in your area. Please see Advice-Only Search and Screening.
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If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Harry – I agree that advice-only is a fantastic option for many people. You’re article doesn’t discuss where to find good financial advisors providing advice-only services. Any tips?
Harry Sit says
If more customers demand advice-only, advisors will respond, just like when fee-only came along as a better option than commission sales. I found my HVAC guy on Yelp. Advisors can list themselves there as well. I hope specialized marketplaces such as NAPFA and Garrett Planning Network can create a filter for advice-only to help customers find advice-only advisors more easily.
Harry Sit says
Before those organizations make it easy to filter for advice-only, I offer a paid search and screening service. See Find Advice-Only Financial Advisors.
“You’re article doesn’t discuss where to find good financial advisors providing advice-only services. Any tips?”
The Garrett Planning Network (http://www.garrettplanningnetwork.com) does it. From their faq:
“What’s so different about Garrett advisors?
Members of the Garrett Planning Network provide their advisory services on an hourly, Fee-Only basis. Members do not accept sales commissions or any compensation other than directly from their clients. Clients pay only for the time an advisor works with or for them. Some Garrett advisors also may offer their services on a retainer basis”
As this is a network structure setup, ymmv depending on the participating adviser chosen.
Harry Sit says
Garrett Planning Network members provide hourly as-needed service but they don’t have to be exclusive as in “advice-only.” Many use it as an intro to their “full service” management because that’s where the money is.
Great article. Very important advice! 🙂
I am looking of calculators that help me figure out sequence of withdrawals from 401k and IRAs when one spouse is 60+ and the other is still working. How to jell one income with the withdrawals and SS when 70+ for lowering tax burden and RMDs?
This is where I believe advisor can be of help or a really good calculator/spreadsheet as a starting point. There! I requested something Harry 🙂
Bravo… this is such common sense, why isn’t this written about more frequently? Finally, I have a definitive web link to pass around to family and friends. Thanks!
This topic was discussed on bogleheads forum a long while back. Rick Ferri responded that advisers that have tried this model have been unable to make it work and eventually transition to the AUM model.
Harry, I often wonder why friends I know are quite smart do not take the time to become financially literate. I think they are afraid of messing up. Nowadays one can buy a target date fund portfolio or Mike Piper’s Vanguard Life Strategy fund if they want to be hands off.
My question is how can one educate themselves to be more tax competent?
I have read your writings and know you have become “expert” on tax issues and don’t think it was your background.
I had a free call with a Vanguard advisor who strongly suggested me seeking a tax professional to answer my questions on tax planning.
While I am quite proud that I have built a substantial net worth- $4.5MM all on my own, I do wonder if I do a tax advisor. The problem there is finding a good unbiased one, and I am not sure how to go about finding one.
Harry Sit says
You can learn about taxes from reading books or attending classes. I see H&R Block has a class for $149. In my area the classes run twice a week for three months or three times a week for two months (60 hours total). The classes are starting right now. They do it to train a pool of potential workforce for them. You of course can just take it for your own benefits.
If that’s too much time commitment just read books. Mike Piper’s Taxes Made Simple is a good starting point. The more detailed J.K. Lasser’s Your Income Tax would be the next step.
It’s hard trying to find a good advisor. I used on from Garrett a couple years ago. The level of knowledge is good for a normal person, but I want someone like The Finance Buff who can go into details of tax efficiency, financial independence planning, and backdoor Roths. Are those advanced topics?
It is insanely difficult to find a good one.
I was at a pool party and one of the guys was talking about how he had switched careers in his mid-50s from an awful marketing job to financial advice based on an offer from a fellow from gym whom he happened to chat between workouts. He had not passed an Series 6 and other such exams yet, his firm charged 1% AUM and folks were falling over themselves to book an appointment with him as they felt he was a friend and will look after them more than the advisor they were dissatisfied with. It was beyond bizarre!
It made it amply clear that folks looking for just advice are the smallest of the minority and it is not yet a viable business model as confirmed by Rick Ferri.
Harry Sit says
Expensive and not-so-qualified advisors stay in business because their customers become a customer in the first place and stay as a customer. As long as customers continue to select advisors based on social network and fear of the unknown, good sales skills will continue to win. By this post and maybe follow-ups I’m hoping more customers will demand advice-only and seek out those good honest advisors who treat them as competent adults who can easily carry out the advice.
Harry Sit says
Alex – I don’t think those are advanced topics. Of course different advisors can specialize in different areas. If you are looking for advice in some specific areas, you can make it clear up front during the initial meeting with the advisor. If you sense lack of competence you can choose a different advisor.
I believe “A competent adult who can easily carry out the advice” is a person who has higher financial literacy level (typically more than even a commissioned advisor), understands taxation rules, and is able to overcome inertia to follow through. I believe your blog is an invaluable refuge to those “competent adults.” Thank you!
When I first started commenting on this blog, I was wondering if social security is withheld on 401k contributions. Through nearly 10 years of continuous learning and a few mistakes, I performed an online after-tax withdrawal/distribution and a successful mega backdoor Roth IRA transaction few months ago. I understand the reasoning behind bonds in taxable in the low yield environment. More importantly, about Lifestyle design, which has clarified the purpose and the path for my financial independence and helped me put this whole exercise of series of transactions into perspective.
Harry Sit says
Thank you for the compliments. I’m glad I was able to help. However I don’t think one must become deeply knowledgeable in order to be a competent adult able to carry out the advice. I don’t know how drugs really work. I just take them as my doctor tells me. When the HVAC guy told me to bang on the air conditioner box, I didn’t know why. I just did it. Now I know because I wanted to know. If I didn’t care to know, I would still be a happy camper and carry on. If someone goes to an advisor and the advisor gives a set of clear instructions, the customer doesn’t have to understand the nitty-gritty behind the advice.
Yes Harry agree with you. The reason I believe that such a person has certain characteristics is because I believe those skills help to deal with uncertainty in outcomes. Doctor’s advice and HVAC guy’s advice to bang on the compressor is far more definitive. In financial advice, good strategy does not necessarily result in good outcome as you discussed before. Doctor’s advice and HVAC guy’s advice have immediate resolution if it results in bad outcomes – stop taking the pill or go to ER if warranted, use breaker panel to stop the AC etc. I am certainly willing to be wrong on this.
Despite all the well documented downsides of having even a good ethical fee-only fiduciary financial manager/advisor handle one’s portfolio for 1% (for example, that 1% really adds up…it’s compound interest working against the investor) there are some people (I know a few who really personality of skill-wise may be better of with that than some of the alternatives you well describe.)
My biggest issue with that 1% for the clients who do seem to need them is that the manager gets paid even if the portfolio he/she has set up losses (through managers misjudgment or not) loses the client’s money.
I’ve had those managers point out that their interests align with the client…., that they are incentivized to not lose your money because their 1% slice goes down if they do. But they just seem to not really get (when I’ve engaged them on this topic) that if a 70 year old retired couple has a modest one million dollar portfolio and it goes down $150K that’s a really significant life altering loss to the client, that they may never recover from in, say, their remaining 20 years of life, but it’s only a $1500 nuisance loss to the manager. Hardly equally incentivized to protect against loss. And charging the client the full 1% ($8500) on their remaining nest egg for having lost that much cash is adding insult and further injury. That said, there are IIRR a few managers whose policy is if your portfolio loses value in three subsequent quarters they waive their fee for those quarters.
Just my four cents about a pet peeve. (Two cents doesn’t cut it, dollar devaluation, etc.)
Harry Sit says
I used to believe that as well, but now I see I fell for the false dichotomy. If the consumer can’t consistently carry out the advice, the solution doesn’t have to be letting the advisor manage the money for 1%. If the investor is prone to panic selling, (a) maybe the asset allocation or the investment selection isn’t correct; and (b) the advisor can sign them up to a texting bot that sends a text to the investor every day with “don’t sell.” If the customer isn’t good with follow-through the advisor can set up automatic email/text reminders with “Did you do what we talked about yet? Any questions?” Jumping directly to 1% is a money grab in the name of for the benefit of the client.
Suppose I have an infection and if I don’t take the meds my doctor prescribed I will die. That doesn’t mean the doctor can claim a percentage of my future income because the advice literally will save my life. Unless I’m truly unable to take my meds the solution is simply reminding me to take them.
BTW, your AC unit is not really fixed. You have a faulty relay switch and if it got stuck once, it will almost certainly do it again. But it was good of the guy to help the way he did. Reward him by calling him back to replace the part at his convenience.
Harry Sit says
After the good honest HVAC guy pointed me to the right direction, I was able to replace the part myself. The part is available from Home Depot for about $10. It took me about 15 minutes to do it (it would probably take him two minutes). I had no prior knowledge about AC before this episode. It just sat outside running. No special tools were required, just screw driver. Again, the knowledge played the most important role. Actually doing it, not so much. I offered to pay him for the diagnosis. He declined.
Harry wrote, in part…
“….. I offered to pay him for the diagnosis. He declined..”
I do home and small office computer support (actually pretty much retired from it) so have had many occasions where I’ve just pointed someone to a possible fix over the phone rather than take the paid service call. Occassinally I’d ask to be paid for the support with “I’m willing to try to fix this over the phone, but if I fix it how about $25 if I do and zero if I don’t?” Other times I’d just do the quick fix. Sometimes the person would offer to pay me, often I’d decline graciously or accept graciously. Can’t tell you why one time and not the other. In part my economics at the time, in part flying by intuition.
Of interest (to me and maybe others) is a learned a lot from my clients. I’ll never forget two clients: One, while writing his check to me said “Worth every penny of it!” The other, who was a multimillionaire, would always try to haggle a bit for a better deal.
Guess which person I would be likely to be willing to make an emergency call to on short notice on a Sunday. 😉
What I learned was the value of letting people _know_ I valued their services any time I could honestly and sincerely say so (and that is often.) It’s a cliché, but many of us are motivated by appreciation and other factors as much as of more than for money.
Excuse me for getting off-topic.
Kudos on your new offer to help others find the right financial adviser.
If all this does is help a few people find the right advice-only adviser, it will have been a good thing. But maybe this will lead to something bigger. Perhaps you inspire others to do similar, increasingly the number of people positively effected. Perhaps you slowly assemble a financial adviser database that leads to some community database. Most realistically, perhaps your efforts start an advice-only meme that generates greater awareness of the option. This is an option that deserves to be mentioned in any standard financial self help book or web site blog. It needs to become a cliche. “Have you considered an advice only adviser?
Harry Sit says
Absolutely. I want to make advice-only a thing. More people would feel comfortable seeking advice. People who currently pay to have their money managed would get more and pay less by switching to advice-only. Advisors who operate as advice-only would get more business. More advisors would switch to advice-only when they see the demand. Let’s make it happen!
Of course your analogy to financial management and its ongoing numerical/statistical/behavioral complexities is way off.
You’ve badly underestimated the importance of ongoing guidance. Regular reviews, periodic check ins, a well-written monthly newsletter all serve to keep an investor knowledgeable, confident, and disciplined.
The byproduct is, most likely, they are able to stick with a more growth-oriented portfolio (more stocks, less bonds), and one that is more diversified across value and small stocks globally that have delivered higher returns (esp. when we consider using DFA funds compared to retail Vanguard indexes). This means higher net investment returns.
And by staying more disciplined, they avoid the all-too-common behavior gap that even most Vanguard investors pay (Lifestrstegy Growth Behavior Gap = 0.9% per year over last decade per M*). This means higher net investor returns as well.
When it comes to advice and ongoing management, you get what you pay for. The hourly fee model has a smaller up front cost, but will likely cost most people far more in the long run.
Harry Sit says
Of course it’s very important. Advice-only planners/advisors offer reviews and check-ins as well. They just charge an honest hourly rate for the actual reviews and check-ins.
Index fund advisers concerning fund expense ratios: “Costs matter”
Index fund advisers concerning their own adviser fees: “You get what you pay for”
On fees, you never want to pay for something where value doesn’t exist. And we know paying high expenses for active management falls in that camp.
Paying fees for ongoing advice is a different story. No less than Vanguard has published a study showing advisors can add North of 3% a year in benefits. And this is before we consider the additional (1% to 2% a year over time) for superior fund implementation – which hourly advisors cannot do, they’re limited to retail index funds/ETFs. Paying 1% to do better over time by 2x to 3x as much, while saving time and being more confident/having greater peace of mind? That’s money well spent in most cases.
As I said, on behavior alone we’ve seen investors in Vanguard’s Lifestrategy funds lose almost 1% per year to bad behavior. Precisely the cost an advisor can help you avoid. Not saying every advisor excels at this. But a good number do.
Harry Sit says
Someone said something about failure to understand when your livelihood depends on it. Please continue, Eric, because you are demonstrating exactly why consumers should demand advice-only: to exempt themselves from dubious sales pitches. Every point you raise also provides material for my future blog posts on how to detect false claims. So thank you. Keep them coming. I need more.
There are plenty of advice-only newsletters. They pick mutual funds, allocations, etc. They disclose if they are affiliated with any of the funds. Newsletters are cheap. One pays for annual subscription not by the hour.
Harry Sit says
Newsletters are not personal advice. They also tend to be on the active management side, either stock or fund picking or market timing. If a newsletter just assures the subscribers to stay the course, it can be effective.
I thought we could have a mature discussion about the services and value that advisors who charge AUM fees can provide, free from personal attacks and insinuations about questionable morals. Sadly, I guess not.
It sounds like you do not have health insurance. When I see a doctor my health insurance company pays most, if not all of the fee. Health insurance plans most closely match a monthly retainer model.
Of course, when I see my doctor I wait for 45 minutes in a waiting room and then ultimately only receive 5 minutes of her time. Not a good experience.
Good luck with your new business!
Harry Sit says
Health insurance for the most part is a tax to help others with pre-existing conditions. See Health Insurance As A Tax. Let’s not complicate it by bringing in insurance.
I din’t intend to divert from the main topic, Harry.
But FWIW, I think you’ve misinterpreted that in your definition of health insurance.
Pre-existing conditions are general not “subsidized” by other members of an insurance pool. Until recently, and possibly only temporarily, under the ACA , the vast majority of persons with pre existing conditions trying to get health insurance (and still many) found they either could not get insurance at all, or only prices way out of their reach and proportional to the underwriters’ estimates of increased risks, or they could get insurance but it will explicitly exclude any benefits for the pre-existing condition.
I know this well, having had many friends self employed unable to get health insurance because of relatively minor health history issues.
(Of course I’m talking about the USA, not the many industrialized countries that essentially have universal health coverage. )
All insurance is, at its _fundamental_ base, a strategy for groups of us spreading some kind of risk among our members….. so that individual members of our group, society, or industry can undertake some activity that no one of us could afford to take the risk of alone.
The classic early example was maritime insurance. Few merchants could risk the shipping venture if they risked losing their shirt, uninsured , from a single shipwreck .
Another way of looking at it is a bunch of us getting together and agreein we will cover each other’s backs if one of those runs into trouble.
That said, unfortunately, as I’m sure you know it doesn’t always meet that standard,. Just as our supposedly free market economy does not always function has a hypotheisjcal free-market which requires full free movement of information, capital, and labor.
Comparing financial planner compensation to doctors fees was a bad analogy from the beginning. Lawyers are a better profession to compare against. Many lawyers charge time based fees, but other attorneys charge based on contingency and still others charge by the document.
Time based attorneys are accused of padding their time. Contingency based attorneys are accused of settling too quickly in order to get paid without doing any real work. Attorneys who charge by the document often use boiler plate documents and do little to no real drafting.
Every fee model has inherent conflicts, including the hourly only model.
Referral services also have conflicts of interest…
Harry Sit says
You only say it’s bad but you never say why. It’s not bad only because you say so.
Fees for doctor’s visits are often impacted by insurance and may not even be paid by the consumer at all.
Alternatively if you are a private payer then you will have a heck of a time determining in advance what you will be charged. There is obscurity either way.
Doctor fees don’t provide a good example just because you say so.
Harry Sit says
I already said I don’t want to complicate it by bringing in insurance. If you want to discuss the role of insurance, we can do it on the health insurance post linked under comment #14. From the doctor’s point of view, at least in the office visit context, regardless who pays, they are paid for giving their advice. The point is to distinguish the high value part — the advice — from the low value part — taking pills.
If insurance clouds your thinking, think dentists. Every time I get a clear quote for what it costs, with or without insurance. They get paid when I need a filling or root canal. That’s the high value part, using their special training. They tell me to floss. Doing the flossing itself is the low value part. They don’t manage my teeth by flossing for me.
Gregg Sneddon says
I enjoyed the article – as a fee-only financial planner, I find that one of the biggest issues that people face is Newton’s first law of motion or “inertia” that states that a body will continue in its present state of rest (or motion) unless acted on by an unbalanced external force…I like to think of what we do as being that “unbalanced external force”.
So people can pay for advice only but far too often they dont implement – life tends to get in the way…and that’s where our retainer model comes into play…we keep our clients accountable to make sure that they act…
Looking forward to reading more in the future