The following is in response to Bob Veres’ article, Why Are Advisory Fees Lower Than They Have To Be?, which was published on July 10:
Dear Editor,
One reason that some of us charge lower fees that was not mentioned in the article is that we are in a highly volatile but low-return market environment in which higher fees could literally wipe out client returns. If you have a lot of retired clients who are drawing their living from their investable assets, fees become a major consideration. For the services I offer I could charge more. But, bottom line, how much would my clients make after fees, and could they live on those returns? We aren’t in Kansas anymore, Toto!
Cheryl C. Johnson
Wealth Advisor
SeaCrest Wealth Management, LLC
Medford, OR
Bob Veres responds:
Cheryl, thanks for your comments. I do a fair amount of speaking at various conferences, and of course since 2008 my fee has looked enormous compared with the constrained budgets. Before 2008, people were paying the very same speaking fee out of petty cash. So I know the dynamic firsthand.
On the other side of the discussion, I'm sure the market for advisory services will bear a bit less today than it would pre-2008, since so much wealth was destroyed by the Great Recession. But the analysis I published was conducted in the current (non-Kansas) environment. So the anomaly I was reporting should fully reflect today's constrained market.
Somewhere in the middle of all this, though, I think you have unearthed a great (and surprisingly subtle) point about why the price-setting process is different for advisors than for any other profession.
Different how? I think we all know that a doctor isn't going to charge less-wealthy clients less for his/her services, and certainly won't examine a patient's finances before deciding how much to charge. The same with attorneys. The same with plumbers.
But... Uniquely among all these professionals, financial planners are in a position to know what their customers/clients can afford, and they conduct this evaluation as a matter of professional routine. When you have this information, what do you do with it? Do you decide that Client A has more than enough to reach his goals, and can afford your full fee, but Client B, who might be close to the edge of success/failure, cannot afford that amount? Do you decide to charge only what clients can comfortably afford? If you do, what formula would you apply to that consideration?
This could lead to a very interesting discussion in the profession. I think any professional management textbook would say that you should ignore this "customized affordability" information--but realistically, if you're sensitive, and if you are concerned about your clients' welfare, how can you? This detailed awareness of a client's financial situation makes financial planners unique among all professions. Depending on how you look at it, this added information either provides a powerful distraction to the normally straightforward process of charging for your services, or (alternatively) it gives you much more data on how and what to charge your customers/clients.
Cheryl, if I had the wisdom to give you a definitive answer, I would. As it is, I think you've done a great service by raising a subtle point that we (the profession) haven't really articulated clearly. Now that the issue is on the table, it can be debated, and perhaps some clear answers will emerge from the wisdom of the professional crowd.
Best,
Bob Veres
Inside Information
