Updated: Nov 15, 2019
By Daniel Goodwin
Recently a friend shared a Wall Street Journal article with me on ultra-low cost advisor subscriptions as a new trend in our industry. It was a good article. The article espoused the virtues of keeping investment cost to a minimum which I agreed with. It also talked about the value of planning and I agreed with that too. It talked about how technology might replace investment advisors in the future which I found interesting. I decided to explore the question of if our firm would be replaced one day by a sophisticated computer program and/or algorithm and found myself asking several complicated questions which the article did not address.
To begin with, financial planning can mean different things to different people; like taxes. HR Block can do a basic return almost for free, but if you want strategy and structure and planning, and from a high level and qualified team of CPA’s and Tax Attorneys, it's going to cost money, but should still provide a great cost/benefit result.
Someone with little income might be best served by an HR Block, while a business owner and higher earner might be better served by hiring competent tax professionals with credentials and experience who can take the time to solve the more complex problems associated with our very complex tax code. Most people would agree I think.
Financial planning an also be like washing my car….I can go through the HEB drive through car wash for 6 bucks and say I got my car washed, but I can also go to my best detail guy and it will cost 150 for my RAM truck. Here’s another one….Legal Zoom is almost free, BUT, for me, I'm not depending on courtroom defense internet pages from Legal Zoom if I am wrongly accused for murder; I'm hiring the best of the best and it will cost what it costs.
Recently I was approached by an advisor of one of the large wire house firms who was looking to join a firm like ours. The name of the wire house is not important but rest assured it was one of the household names of which you can take your pick. These are the firms that have their name and brand on television nonstop, their name is on stadiums, as sponsors of PGA Golf tournaments, and on the side of some of the largest buildings in the largest cities in America. You might even be able to hum their jingle.
They are household names and the chances are good you may already have an account with one of these firms. The wire houses all have much in common, lots of accounts per employee, lots of on line calculators, lots of trades, and lots of options. You can open an account online and then be trading options in a matter of minutes. Personally I would compare this with walking into a casino in Vegas and using my credit card to get a few hundred dollars in chips, and then stepping up to a gambling table and trying my luck. Many investors today would have a hard time differentiating between prudent investing and speculating and gambling. This individual wanted to come to work for us were we willing to hire him. I will add here that he's an awesome guy, CFP, great attitude and experience. He's immensely frustrated that he wants to serve his clients well, yet he maintains oversight of about 5000 households. He said he's doing good if he can just get back to them (inbound call) in 2-3 days, and keep the call to less than 5 minutes. He is told to point them primarily to the firm's proprietary mutual funds and the firms free online planning tools. This is what planning is in his world. He estimates he takes well over 150 calls per day and is not allowed to email anyone ever.
Some of his clients are his friends and family and he's fed up with "caring for" 5000 families and not having the time to take decent care of those he truly wants to serve. He said he has never met in person the vast preponderance of those who he speaks to on the phone very day. He also said his job is way too simple; pointing callers to the firm website, planning calculators, and to the firms proprietary mutual funds. His company pays him 60K per year, and he estimates that as soon as the firm can clean up the accents of the kids in Bangalore and Manila, an "advisor" will cost the firm much less. I asked him if he was aware that some wire houses are already hiring foreign labor to construct financial plans and he said “absolutely”.
To be as honest as I can I find this disturbing…I see the winner's in this the broker dealers, who will make all they want to make on trading cost, bid/spread gains, redemption cost, 12B1 expenses and other implicit internal expenses. I see the losers being the average American who estimates hold that 75% are nowhere close to being anywhere ready for retirement. Higher net worth clients, the clients we serve, and family offices of over 25 million in assets won't tolerate the commoditized stripped down models the broker dealers are rolling out, which I might add have been around now for about 25 years.
Even Vanguard, the 900 pound gorilla of ultra-low cost investing has produced a White Paper that shows that their clients who pay extra for advice earn as much as 3% higher net returns on average than their clients who opt for the ultra-low cost, do it yourself investing. You can read the White Paper here - https://www.vanguard.com/pdf/ISGQVAA.pdf
Every client of Provident Wealth Advisors has my word that we are not entering the race to the bottom. We’re not selling anyone out EVER. Most of our new clients come from these large wire house firms where people tell us they have no earthly idea even who their "advisor" is, as how could they. Most have never even spoken to anyone from the wire house. The team at Provident will continue to provide comprehensive, holistic, integrated, and fiduciary based financial advice for a few select families and small business owners right here in our community. We will continue to advocate, to serve and to protect our clients. We will confront a self-interested industry that puts profits over people. We will continue to take pride in working alongside our clients to plan for and realize their life dreams.
If you find yourself considering one of these ultra-low cost investment/robo solutions I will leave you with this fact on which we may or may not agree, and on which you can quote me. “There is not a product or service known to man that cannot be manufactured at an inferior grade and offered at a lower cost”. In the financial services industry those who fall for this ruse may pay a price significantly greater than any perceived savings”.
For some, the net effect of such may be, not being able to retire, depending on children or government for financial support, giving up on dreams, and the loss of dignity which is a price far too high to pay in my humble opinion.
I would encourage anyone reading this article to find an advisor coach and a team who can help you build and plan for the future you envision. It’s going to take a little bit of work but I assure you it’s worth it. There are some great planning teams out there who can help you get to where you want to be. Your part is the vision and goals, and your planning teams job is the structure, strategy and execution. Every professional athlete has a coach, shouldn’t you? By working together, out team at Provident believes you and your family really can have the future you have always hoped for.