Call to change the fee-based model

Call to change the fee-based model

Call to change the fee-based model The fee-based approach won’t work for many new to that model, says one expert, recommending advisors instead offer a service considered outmoded.

Fee-based veteran Jack Kennedy’s recent article for cut right to the chase by suggesting a very old-school way for advisors to add value in an increasingly difficult and competitive operating environment.

Kennedy’s solution?

Pick stocks.

The Florida advisor says that brokers who once survived through commissions and are now charging a percentage of assets under management have simply shifted their clients to the new compensation system without changing the investments held in their clients’ portfolios.

In some cases they moved their clients to lower-cost ETF strategies putting them in direct competition with the numerous robo-advisors that have cropped up in recent years.

The problem, says Kennedy, is that the low-fees charged by robo-advisors puts in doubt what, if any, discernible value their advisors provide.

“In my opinion, advisors should be continually educating themselves the way a computer cannot,” says Kennedy. “This aversion within the investment community to recommending individual stocks comes from many of these same traditional brokers and advisors, entirely based upon the fact that investing in individual stocks requires hard work, time and attention.”

His argument continues by suggesting this kind of hard work is exactly what clients are looking for from an advisor.

“This is the type of hard work and research investors would expect and welcome paying an advisor a fair amount for,” says Kennedy. “It’s the old-fashioned investment management that advisors used to perform, before the industry became obsessed with earning commissions or falling prey to media-driven narratives about risk.”

Canadian financial planner Dan Bortolotti twigged WP to this contentious idea in a retweet from Rick Ferri, a CFA with more than 20 years financial services experience south of the border.

Ferri wasn’t necessarily reacting to Kennedy’s article itself but rather the headline for a subsequent story that ran on Financial Advisor IQ objecting to the characterization of robo-advisors as a threat.
  • Sean Straughan CFP 2015-04-22 11:32:48 AM
    Excellent article. I use the following analogy based on my own true story. I go to a Chiropractor. yr 1, 3 adjustments each time, yr 2, same 3...hmmm, yr 3, same 3...something's not right, yr 4, same 3, no value any more, new Chiropractor. Advisor's need to be continually demonstrating they are doing something to justify their fees, not just holding yr after yr.
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  • John Page, R.F.P.,CFP,RFC 2015-04-23 11:11:24 AM
    I concur with Sean that if the review is the same every year. But, some holistic financial planners do more. Some review a long check list - like a mechanic - and come up with stuff that requires attention. The rule of thumb for this way of operating is to produce a formal Action Plan that articulates all actions that should be taken by the advisor/or the client over the next 12 months (What/when/who/ and why). Most important is a new long term financial projection looking a probability of becoming financially independent which generates items for the Action Plan to be addressed .You get it, a bunch of hard but important work that endears clients for life - and probably makes the you somewhat impervious to a robo -advisor. In fact this service adds enormous value outside the areas that any robo will touch (today anyway). You might actually deploy a robo as step 1 in providing a service like this. There is obviously a fee attached to this.
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