A few thoughts on conflicts of interest and fees…
Like all service providers, we charge a fee for our services. There were three inputs when we developed our fee schedule during Resolute Wealth Management’s germination. We knew we must (a) cover our costs, (b) generate enough profit to provide for our own families, and (c) ensure the value our clients receive far exceeds the fees they pay. I suspect this formula is unoriginal. Most wealth management firms likely engage in a similar exercise. But there is one aspect regarding fees in which we find ourselves a bit unique. We do not discount our fees for clients with more money. In our experience, most advisors will happily discount their fee to whatever amount will induce a multi-million-dollar client to hire them. Ostensibly, this seems good for the client. All else equal, everyone prefers to pay less in fees for everything, from financial advice to dentistry.
But all else is not equal.
We talk a lot about conflicts of interest in our business. One conflict of interest with our fee model (charging a percentage of assets under management – the most common model in the business) is the incentive it creates to recommend clients prioritize investing excess dollars rather than buying real estate or CDs or doing something we don’t charge fees on. We believe our track record indicates we are not affected by this conflict of interest (lots of time encouraging clients to buy houses and build healthy cash positions and even to spend more money). But the conflict does exist. We are aware of it as are our clients. Other methods of advisory compensation have their own conflicts. Advisors paid by the hour are incentivized to spend excess time on projects for clients and clients are disincentivized to seek their counsel when needed (“he’ll send me a bill for a phone call!”). Some advisors charge a flat fee, which creates an incentive to load up the client roster and spend the minimum amount of time on each client. I am not saying this is what these advisors do! I think most of them do a good job managing the conflicts. The point is that conflicts of interest are inevitable regardless of the advisor’s method of compensation, and both the advisor and the client ought to understand what those conflicts are.
But there is one other giant conflict I rarely hear anyone talk about. It is the biggest conflict of interest, and it plagues every advisor – client relationship regardless of how the advisor is paid. The fatal conflict of interest:
If the client doesn’t like the advisor’s advice, they can fire that advisor and find an advisor whose advice they prefer, incentivizing the advisor to offer advice the client wants to hear rather than advice the client needs to hear.
Our industry has – unavoidably – institutionalized confirmation bias.
We see the fallout from this conflict of interest often. Clients whose portfolios have recently had the latest hot stocks/funds added. Stories about the counsel of former advisors during the market panics of ’08-’09, 2020, and ’22. “My advisor told us we were getting out of the market in March of 2020 until things settled down a bit. We got back in that summer.” That may sound benign. March of 2020 was scary. Worldwide government-imposed lockdowns. The fastest 30% drop in stock market history. Do you know what every single client wanted in March of 2020? To stop the bleeding and get out of the market. They say people don’t remember what you say, they remember how you make them feel. Well, people whose advisors told them they were getting out of the market during fifteen days to slow the spread felt great.
It also incinerated their long-term wealth, as the 50 days beginning March 23, 2020 turned out to be the best 50-day run in stock market history. Families who missed that 29% market advance[i] saw a 29% reduction in their wealth compounded ad infinitum. That is the thing about missing market runups – you miss those sudden returns as well as the compound growth on those returns forever.
If the client doesn’t like the advisor’s advice, they will fire that advisor and find an advisor whose advice they prefer, incentivizing the advisor to offer advice the client wants to hear rather than advice the client needs to hear.
We spend a lot of time working for our clients on their full-service financial plan – retirement income planning, tax-efficient charitable giving, cash flow planning, tax management, risk management, advice on random one-off events like big purchases, real estate transactions, etc. But we earn multiples of our fee by helping people stay the course when every fiber of their being is screaming to make a change to their investment portfolio. Sometimes it’s the urge to buy crypto or Nvidia or whatever is printing temporary wealth for others during periods of euphoria. Other times it is fleeing to the perceived safety of cash during market panics. The comprehensive planning work is important, but the value that far exceeds the fees we charge comes from our counsel during those critical moments in our clients’ investing lives.
It is the most critical and the most challenging part of our job. A responsibility we do not take lightly. In these moments, our charge is to provide the guidance our clients need to hear in direct contravention to what they want to hear knowing full well there is an abundance of other advisors that will gladly lure them away from us by telling them just what they want to hear.
Our promise to our clients is that we will always tell them what they need to hear especially when it is not what they want to hear and risks us losing their business. It is in their long-term best interest.
So back to discounting fees.
An advisor discounting their fee to win a client’s business is telling a client what they want to hear in order to earn their business at the inauguration of the relationship. An unconscious surrender to the fatal conflict of interest. If your advisor is willing to discount their own compensation simply to induce you to hire them, he or she will likely tell you what you want to hear to keep earning their compensation from you – even if it is detrimental to your long-term wealth.
So we don’t discount our fees. The fee is the fee. The advice is the advice.
One other note here – Rory and I are very cognizant of our capacity. We are not obsessively trying to earn as many dollars of revenue possible per unit of fixed cost. We are not scheming ways to squeeze a few more basis points of margin to appease shareholders. That is one blessing of being in business for ourselves. There will come a day when we can no longer bring on new clients as our existing clients will demand all our time (this is a day we look forward to – we like spending time with our existing clients!). This is another reason we do not discount our fees – we can only work with so many households, so we need them all to pay the full cost. If we discount, we create an incentive to cram more clients into our practice, limiting the access and attention our existing clients receive. We do not think our existing clients would appreciate that.
Sean Cawley, CFP®
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[i] YCharts, Fundamental Charts, ^SPX Total Return Level, 03/23/2020 – 05/12/2020.