I WAS A RABID football fan as a kid. I would sweep across our front lawn, fantasizing about the many and varied ways I would run to daylight for Hewlett High School. But when I finally got the chance, I lasted only a few practices. I hadn’t counted on all the bruises that came with the program.
So, too, was it with my brief stint as an independent investment advisor affiliated with a large discount broker. After a career as a university professor, and while still working part-time as a psychologist, I realized my lifelong dream of becoming a financial advisor. But once again, I got stopped at the line of scrimmage.
I fancied myself a deliberative portfolio manager, not the administrative secretary that the job required. I sought the heady stuff like aligning asset allocations with clients’ needs and risk tolerance, but instead found myself walking them through tortuous retirement-plan application forms.
Admittedly, the investment world hardly needed another self-proclaimed portfolio manager to rake off maybe 1% of an investor’s stake, or about 10% of his or her average annual return. I limped off the playing field chastened and wiser about the distinction between dream and reality.
But I’m not here just to bemoan my fate. In my brief time as an advisor, it soon became apparent that questions of trust and integrity were far more difficult than those of which way to tilt a portfolio. Often legally bound as fiduciaries to put clients’ interests before their own, financial advisors must wrestle with the moral weight of their recommendations.
Consider the ethical dilemma that arose when a 78-year-old widow, whom I’ll call Ivy, gingerly entered my office. She told me she had earned just $27 in annual interest on her $10,000 of savings at her local branch of a national bank. Haltingly and vulnerable, Ivy asked if she might safely get more. She said her and her deceased husband’s state pensions amply covered her living expenses. My client impressed me as frugal. She had no significant debt. She also had a whole-life insurance policy she could tap in an emergency.
It soon became evident that Ivy was not investment savvy and that any financial decisions would be made by me. This was a few years ago, when interest rates were infinitesimal but possibly soon heading higher with inflation. I suggested certificates of deposit to increase her return and Series I savings bonds to protect against any rise in inflation.
Those recommendations were easy for me. Sure, there were alternatives, but this strategy seemed eminently justifiable. I charged an hourly fee for my services, so my compensation was not affected by selecting two commission-free investments. No need to wrestle with a conflict of interest between what’s best for my client and what’s most beneficial for me.
But what if my income was tied to commissions, which CDs and savings bonds do not produce? I was lucky. I had other sources of income, while most advisors don’t. I have attended several advisor conferences and don’t recall even a handful of presentations on CDs and savings bonds.
How do advisors who depend on earning commissions defend a practice that repeatedly pits their own financial well-being against their conscience? The mantra is, “We need to be compensated for our time and expertise.” Certainly they do, and they should be. And an hourly fee would accomplish that and do an end run around commissions and the inevitable confrontations with an inherent conflict of interest.
I know what you’re thinking, folks. How could this obviously sanctimonious guy level an hourly fee of $175 that might well gobble up much of his client’s first-year interest income? Well, this one was almost pro bono. I charged Ivy for a 15-minute session, and helped her set up her CD and TreasuryDirect accounts, which took far more than 15 minutes. With that attitude, maybe it’s no surprise I didn’t last long as an investment advisor.
Don’t get me wrong, I’m no saint. I regularly raise rents on my tenants and I peeked over the shoulder of the girl sitting in front of me during my college econ final. My journey as an investment advisor didn’t go as planned. But I managed to leave with my soul intact.
Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.
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Thanks Steve, I agree wholeheartedly. It’s a moral dilemma; especially around cash and cash like investments in the Assets Under Management (AUM) models. I think those investments should not be included in the quarterly fees and paid as you were nominally, maybe 0.10 to 0.20% fixed fee. A money market is cost effective and easy to do and does not require complicated financial advice. And, yes cash is an asset in a money market account.
This is why I DIY invest and take my own lumps and do not rely on some discretionary cookie cutter portfolios. Do you really think an RIA spends a lot of time tailoring portfolios to your needs based on some risk assessment form?
They have specific portfolio models that fir the risk assessment and allow for “easy” rebalancing, so that they can tell you, look what I did for you, while at the same time charging you quarterly whether you made money or NOT! If you do, then I’ve got some swamp land for sale in Florida.
PS – Just ask your RIA if they will provide a non-discretionary account for you and see them object or ‘splain’ it away like your an idiot.
You prompt a story. I once had a client couple moving to Southern California and wanting to hook up with somebody local. Their new advisor, a full-service broker rep, informed me the firm does not accept Vanguard no load mutual funds and I would have to cash out before transferring the proceeds to the new account. I did and was later called by the couple and asked what I thought about the first new purchases. He had on first visit split their proceeds into virtually identical commission-lush load funds. How many thousands (at least) of unschooled people have likewise been bamboozled? That’s why we need personal finance classes in high school and college.
I can’t find the words to say how helpful this article, and the comments, are to me at this moment. Thanks so much. I’m retired, recently met with an advisor, made it clear I wanted just to have another pair of eyes on my finances, looking to decide if taking advantage of the recent SECURE 2.0 QLAC legislation would benefit me in my situation. Instead, I had a Monte Carlo presentation nudging me toward slightly more risk to grow my assets. It was a well done presentation for a 30 year old, not particularly suitable for me. It actually was helpful though, since he was courteous, not pushy, and I gained confidence knowing there weren’t any gaping holes in my decision making process. The “initial consultation” was free, lasted 2.5 hours, and we parted as friends.
So nice of you to respond that way and found the article helpful. Glad things worked out well for you. Your experience is just what Humble Dollar is here for.
Steve, thanks for the interesting article. I completed the CFP program about 2 years before I stopped working full time. I also completed the RICP program a few months after I stopped full time. I seriously considered a late-life career change and becoming an RIA. I spoke with several in the industry, and looked into starting my own firm. But the thought of starting a new career at 60 was daunting. As I was trying to make my decision, a lucrative consulting opportunity popped up and I went that route. The consulting was great for a few years until the pandemic. I greatly limited my opportunities form 2020 – 2022. It has pretty much dried up now – out of sight out of mind. There are times I wonder what it might look like if I jumped into the FP industry in August, 2017.
Congratulations on that CFP—that’s one hard exam to crack! I also had (at first) a wish to launch a new career. I found the SEC compliance obligations, which are really more apt to the large investment houses and advisors, extremely onerous. I had to enlist an expensive consulting firm to help me comply. And Rick, get this—I was actually audited by the state of California when my assets under management were still under $100,000! What a waste of taxpayer money when the big boys are fleecing trusting and naive people right and left. After speaking to me on the phone, they dropped the audit entirely. Sounds like you had a better experience than I had until you got upended through no fault of your own.
As Wm Bernstein says, “Treat every advisor, stock broker, and insurance salesman as a hardened criminal.”
A great line from the great William Bernstein!
I think your client was lucky to find you.
Many financial advisors behave as though the main value they bring to their clients is portfolio construction.
Of course, appropriate portfolio construction is not nothing, particularly if it’s organized around a plan that is sensitive to the tax implications of people’s choices on how to save and spend money.
But I think for many people the main value financial advisors might bring them is something close to “peace of mind,” for lack of a better phrase. Many people, and not just financially unsophisticated people, would like some assurance that they’re not doing really stupid things with their money.
It’s easy to see that some folks are not into managing money. They honestly don’t like thinking about it, even though they feel anxious about not knowing very much about how their finances work. Good portfolio construction and a saving and spending plan clearly explained are obviously helpful to these folks, but it’s important I think to keep in mind that the exactly optimal ratio of stocks to bonds in the portfolio is not the goal of the client. The client’s goal is to feel okay about spending on things they can afford and to be reassured that some unkown financial disaster is not likely to ruin their lives, so that they can focus on the things that are more important in their lives than money management. Advisors really earn their fees by providing that assurance to their clients in a cost-effective way, not by running more Monte Carlo simulations.
I’d not scoff at this goal of unsophisticated folks, either. I think a good argument can be made that no matter how interested you are in finances, one of the signal benefits of having enough money is that you don’t have to worry about money so much.
And boy am I and all today’s readers lucky to find such a comprehensive and sensitive post! It should be included in the disclosure packet advisors are required to present to new clients.
I have never paid an AUM fee and I think they are unconscionable. (At first, my employer paid for an annual consultation and these days I pay a fee-for-service planner for a check-up every few years.) if you pay 1% every year for twenty years on a million dollar portfolio you will be out $200,000. I have a really hard time believing that your returns will be increased by that amount over what you could earn in plain vanilla index funds with miniscule fees.(My total fees at Vanguard are 0.08%.)
You summed it up nicely. Know what you are getting from the advisor, and what that advice will cost you. For those who desire working with one, hourly fee based compensation, just like with lawyers and CPAs makes more sense.
You’ve really figured out the game. I love your reminder about the $200,000 left behind. I have come to look at it this way. It’s like the capital gains tax. Just like the IRS, the AUM or commission advisor wants to be your partner without putting up any cash. Time to Travel, good to hear from you again.
Thanks, steve, but I have a very different view of the IRS. Perhaps because I grew up in Engand (National Health Service, free university education, an actual safety net – that was pre-Thatcher) I consider taxes my contribution to the general welfare.
You’ve attained a level of good will and universality I have to admit I still need to aspire to.
Excellent story. What’s interesting is that there is still the relationship going on between product partners and advisors. These product partners still wine and dine and take folks to ballgames. How can this not be a the appearance of a conflict of interest?
You’ve got it. Unfortunately the same in my profession. Doctors are wined and dined and have to confront the dilemma of whether to prescribe that company’s drug or another company’s that might actually be a slightly better fit. That shouldn’t even be a dilemma.
An interesting dilemma as you point out. I agree an hourly fee seems less conflicting.
Yesterday I paid $229 and hour to have my hot water heater fixed. My car dealer charges $385 per hour for repairs – neither, of course, factors the financial situation of the customer. Ivy could have a broken water heater too.
Maybe the answer in your example is that using a financial advisor is not appropriate for everyone.
Some people really do need and benefit from a financial advisor. So many good articles abound about how to choose an advisor while avoiding the pitfalls, but unfortunately not everyone is savvy enough to use the internet to find them.
Thanks so much for your article Counting Down, which helped me to fill in the blanks in my own attempt to do my part when Armageddon arrives.
You have certainly chosen to live in a HCOL area (I remember that your property taxes are way high). I checked the invoice from my most recent visit to my car mechanic (NOT a dealership). The labor charge for the annual inspection was zero, and for changing the oil it was $13.81. No wonder you need 100% of your final salary in retirement. Everyone needs car mechanics, and everyone needs at least some financial advice, but paying by the hour for a fiduciary has to be a better system for the customer.
By the way, my family has lived within five miles of where I live since the 1840s.
Two years ago it cost $75 for a car inspection at a local garage. Yes, going to a dealership is more expensive than a local mechanic, but finding a good, honest mechanic is not easy.
High cost in north Jersey yes. A relative is building a 6,000 sf house in Florida, the ranch house is 85 feet long. Her property taxes will be $2,500 a year. As I may have mentioned, my property taxes on a 2000 sf condo are nearly $13,000 per year.
But of course many prices reflect the area incomes as well.
I know you travel a lot: have you not discovered somewhere else you’d like to live (with lower costs) yet?
(Obviously I’m only half-serious: you want to be close to family.)
That’s it. Our four children and 13 grandchildren live within an hour. We aren’t going anywhere – voluntarily😎
We could move to our house on Cape Cod and save $11,000 in property taxes alone but alas it’s 300 miles away.
any regrets with the Jaguar yet?
You are too smart to get something you can’t afford, but Jags are apparently not that reliable.