Accusations of reverse churning may be the natural by-product of an industry that is shifting more towards fee-based models.
Arguably, it is more the result of technological advances and what investors value the most – financial planning. Reverse churning concerns, essentially, moving clients from commission-based accounts to more expensive fee-based ones and/or making minimal or no trades or changes to your account while still taking a fee.
Rob McClelland helped move his office to fee-based 15 years ago and said there is value in “calming down the noise” in an account and, therefore, conducting less trading.
If an advisor is getting paid to trade less and leave that stock-picking reputation behind them, what does an investor get for their fee? This is where it gets harder to quantify the intangibles of advice, said McClelland.
In the second part of his interview with WP, he said: “What has changed in the last five years at least, is that everybody’s finally realized the importance of financial planning and that what you’re really paying an advisor for is giving you a plan, keeping you on that plan and preventing you from making mistakes.
“It’s about making sure you have enough savings, that you've got the right estate plan, the right kids’ education plan … all those little things. They're tougher to quantify.”
While every client is different in terms of how much hand-holding and communication they want regarding their account, McClelland believes that an advisor who is just managing a portfolio and doing little else will be out of business in five years.
Technology means anybody can build a value-tilted, diversified global portfolio for about 40 basis points or less. McClelland said: “If you calm down the noise in a portfolio, the research shows that you'll probably do better.
“Women typically do better than men because men tend to react more and think that they can outsmart the global marketplace, which they can't. So, do I think there is value in less trading? Yes, although I don't believe in a buy-and-hold because companies certainly go in and out of favour.
“When they're in favour, you have got to be taking some profits off and when other companies go out of favour, you want to add those to your portfolio because they are still pretty good companies.”
The experienced advisor cited various research, including from Vanguard and Russell Investments, that point to the value of an advisor being between 3-4% over time. There is nothing definitive yet, of course, because it’s so hard to put a number on what that relationship means to a client.
“I’ll get a call from a client who wants to buy a condo for their kid,” McClelland said. “I tell them, ‘you don't have the money to do this’. We then have this discussion about why this isn't the right move for you, you're early in your retirement, we don't know if you're getting enough money to do the things that you and your wife want to do. With these types of things, it’s tough to quantify what that’s worth to the client.”
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