Financial advisors: the most overcompensated profession in the history of the universe
When I was reading The Value of Debt and its “sequel” The Value of Debt in Retirement (which didn’t actually add anything new) the author had several example scenarios of how families can use debt strategically to generate income and lower their taxes. Those are somewhat interesting…but what really caught my eye was his casual insertion (and almost total lack of discussion) of financial advisor fees.
Here’s an example he gives in The Value of Debt in Retirement.
Fred & Joanne are well off. They are both 72 and after a lifetime of working hard, saving, and luck they are now comfortably retired. Every year they need $180,000 to maintain their lifestyle. What are they spending that $180,000 on?
- $25,000 on real estate taxes (they have expensive property!)
- $30,000 on mortgage interest (even though they are 72, Anderson recommends they carry a mortgage)
- $30,000 in donations to charitable causes
- $30,000 on investment management fees to their financial advisor
…wait, what?!? Every year their financial advisor gets $30,000? After all of these expenses Fred & Joanne are actually living on $65,000 a year.
They get $65,000 and their financial advisor gets $30,000! Holy smokes. Can you imagine giving an advisor 50% of your income? And Anderson, a financial advisor, thinks it is just par for the course.
Financial advisor fees are nothing new. Much of Vanguard’s monumental success is due to their focus on low fees. But it is always startling to see it laid out like that. And that’s if you can even figure out what your fees are!
A recent Wall Street Journal article details the authors quest to try to figure out how much she was paying her financial advisor.
Describing the fee disclosures of my adviser as opaque would be generous.
After 4 phone calls and several emails the author, Andrea Fuller, learned that she was paying a combined fee of 1.4%. Which we all know is ridiculous — but the key point is how much work it took her to learn that. She naively assumed that in today’s online world it would be easy to look that up online somehow.
Noah Smith’s response to Fuller’s article trots out all the usual things we know about fees and their corrosive effects.
Other than possibly her house, wealth management will be the single most expensive thing she ever buys.
But he also points out that free markets can’t exist when people don’t know the prices they are paying. And the status quo in financial advice means that most people don’t know how much they are paying. Even with Vanguard…who is an exemplar in the industry…they just silently subtract out the 0.04% fee every year.
Imagine if they sent us a bill at the end of the year instead.
Mandatory dollar invoicing would take a hideously complex problem and turn it into a simple one.
Matt Levine, in his Money Stuff newsletter looks at the whole situation — notes that Fuller was technically doing all the right things. She avoided advisors who make a commission by selling you things you don’t need. She picked a “fiduciary” who is supposed to look out for her interests. And the situation is still fucked.
All of the correct boxes are checked: Flat-fee adviser, unconflicted fiduciary advice, even relatively low-cost diversified mutual funds. And yet the combination still seems too expensive.
I don’t know what you do with that.
Even (some) financial advisors admit to the insanity. Over at Humble Dollar, one financial advisor tells us that
Early in my career, an industry veteran summed things up: “This is the most overcompensated profession in the history of the universe.”
