Kitces report reignites debate over advisory fees

The perennial debate over financial advisory fees has reared its ugly head again, thanks largely to new research by Michael Kitces and some strategic social media pot stirring.

On Monday, Kitces, head of planning strategy at Buckingham Wealth Partners, published a comprehensive report on advisory fee trends and the “mirage of fee compression” on

The research, which slices fees into myriad models, shows that “median fees in 2020 significantly increased, relative to 2018 fees.”

The report is rich with details, but the part that struck Rick Ferri, a veteran adviser and dogged proponent of lower fees, was the breakdown of what advisers charge for a stand-alone financial plan.

To Ferri, the $2,500 median price is glaring proof that advisers charging an asset-based fee of 1% on average are gouging their clients year in and year out.

While Ferri acknowledges the initial upfront work of creating a plan for a new client, he takes issue with the $10,000 worth of annual fees charged on a $1 million account when firms like Vanguard, Betterment and Wealthfront are managing portfolios for a third of that cost.

“These people call themselves financial planners, and they might have a certificate on the wall that says so, but they’re charging 1% a year to do portfolio management,” he said.

While Ferri’s outspoken nature ruffles feathers across the financial planning landscape, he speaks from experience.

His current eponymous business, geared toward do-it-yourself investors, charges $925 for a financial plan, and he no longer manages assets. But for 18 years, through 2017, he co-owned the advisory firm Portfolio Solutions, which charged asset-based fees of between 25 and 37 basis points.

Over that time, Ferri said his profit margins were consistently between 30% and 50%, which is the industry average for firms charging three times as much.

“I’m trying to get a discussion going about the real cost of an adviser and what you should be paying to have your portfolio managed and to have a financial plan,” he said.

While Ferri doesn’t begrudge advisers making a good living, he challenges the common industry practice of charging clients 1% of their assets when the services they’re getting rarely go beyond portfolio management.

“They are charging million-dollar clients $10,000 a year because that’s what the market will bear, and yet they call themselves fiduciaries,” he said. “Never having a discussion with the client about what they’re paying you. Talk to clients about all fees, including your own.”

Meanwhile, the pushback from the adviser community, especially on social media, has been along the lines of accusing Ferri of trying to kill a golden goose.

Douglas Garrison, senior wealth adviser at Investec Wealth Strategies, summed up the standard case for asset-based fees as putting clients and advisers on the same side of the table, not discouraging client questions the way an hourly fee might, and reinforcing a long-term retainer-like relationship.

In terms of the level of fees, Kashif Ahmed, president of American Private Wealth, said clients are not complaining.

“We charge 1.5% up to $1 million, and no one has ever objected,” he said. “In fact, a couple of clients have commented that ‘you are worth way more.’”

Colin Overweg, founder of Advize Wealth Management, said the “most important thing is that the client is receiving value for the fees they pay.”

“Given this, 1% as a fee structure is not inherently too much,” Overweg said. “However, if an adviser is merely directing a client’s assets into a cookie-cutter model and collecting 1%, they are doing the client a disservice.”

Ferri pushes back against claims that the market determines a fair price for financial advice, arguing that most clients are not comparison shopping the way they do with other products and services.

“If it were true that the market will determine what’s a fair price, Vanguard wouldn’t have become so successful,” he said. “What’s fair is advisers making money and charging a reasonable fee.”

Bob Veres, owner of Inside Information, has also pushed the industry’s button on the topic of fees and agrees that asset-based fees are due for an overhaul.

“There are very different levels of service and very different levels of value, and we’ve gotten a little lazy on this 1% asset-based fee,” he said. “I think eventually there will be packages of services that clients will sign on for, but that’s not the reality we’re in right now. The whole idea of asset-based fees is outmoded and somewhat illogical, but it served its purpose to move us away from commissions.”

Veres is also not on board with the idea that the market sets financial planning fees.

“What the market will bear is not indicative of anything because the market is too stupid to dictate fees,” he said.

While Veres gives Ferri credit for raising awareness around advisory fees, he believes the push should not be just to lower fees, but to move the industry away from asset-based pricing.

“The real issue with asset-based fees is there isn’t any clear relationship between the value you’re providing and the amount you’re charging,” he said. “It’s just multiplication.”

The post Kitces report reignites debate over advisory fees appeared first on InvestmentNews.

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