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Ron Rhoades, a lawyer, asks: Has Sheryl Garrett invented an RIA future of attorney-like comp?

Members of the Garrett network find pitfalls using flat fees and hourly fees (people want to kill lawyers, remember?) but a template for a fiduciary future may be taking shape

Author Guest Columnist Roh Rhoades August 1, 2013 at 5:27 PM
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Sheryl Garrett is able to give her advisors a steady flow of quality referrals.

Lee Pence

Lee Pence

August 8, 2013 — 9:09 PM

And you know who is the biggest complainer of fees: Lawyers and those other professions who charge fees for a living. I welcome a different compensation model if we can just get rid of the regulations. It costs me $435 (cost of my time for paperwork, compliance, and regulations) to bring on a new client . If all people want is a $5500 Roth IRA they are not going to pay $125 to $250 to a fee-only planner to do it. There has to be a better way. We are pricing out the very people whom we should be trying to help. That is why most people who make less than $50,000 do not have one! And % 70 of Americans do not have a valid will or other necessary documents.

Lee Pence, <a rel="nofollow" title="R">CFP</acronym> </a>

Ron Rhoades

Ron Rhoades

August 8, 2013 — 10:13 PM

Lee, I concur with your concern about the regulations. While prior to the delivery of personalized investment advice there should be, in my opinion, some gathering of data to ensure that the advice meets the financial circumstances of the client, a lot of RIA’s compliance requirements are simply ill-advised.

Government’s essential function in the oversight process is to provide asset verification – i.e., to prevent actual fraud from occurring. After this is done, the oversight should not be any tougher than that provided to other professionals – such as lawyers and CPAs (neither of which possess requirements of regular inspections of their books and records, etc., although CPAs engaged in audits do submit one of their audits to peer review on a periodic basis).

If we are to progress to a true profession, bound together by a bona fide fiduciary standard of conduct, then we can adopt more specific principles which inform professionals more specifically of the Professional Rules of Conduct to which they may adhere. Private legal actions should be available as the means to enforce adherence to same, along with peer review by a professional organization (for purposes of sanctions, including suspension of registration).

All professionals possess difficulty in serving lower-income (or lower-asset-level) clients. Yet, there are business models that lend themselves to serving clients of limited means. These business models include hourly fees, flat fees, and even AUM (some firms offer AUM pricing for accounts as little as $5,000). In addition, there are direct-to-consumer sales approaches, not involving the delivery of investment advice but rather offering an all-in-one product, such as a target date fund.

I myself am have moved my larger clients from an AUM model to a flat fee retainer (billed quarterly). My current clients with less than $500k assets under advisement will remain at a 1$ annual fee.

But more changes might be forthcoming in my offering. I am considering offering three current programs.

1ST PROGRAM: FLAT FEE, PLUS ADDITIONAL TIME CAN BE PURCHASED. I am also considering launching a new initiative, offering a lower flat fee (the same for all clients, regardless of AUM) which includes a certain number of hours of financial planning advice each year; the client can purchase additional financial advice (if needed, which I suspect will be rare). Model portfolios would be utilized, involving passive mutual funds only. The annual fee would be $3,000 a year, and the AUM minimum would be $300,000. There would be no maximum. I’m not concerned about liability issues, as I believe the investment approach (due diligence thereon, and on the funds utilized) meets the prudent investor rule. I am, however, considering whether to charge more in the first year, depending upon the time necessary to establish/transfer accounts and undertake initial tax planning (often involving cost basis determinations, AMT estimates) and trading (including sales of current assets). Annual client meetings, by Skype or phone, would occur, and a “Total Client Profile” maintained for each client. Obviously this would be an attempt to undertake an “efficient” practice, with trained support personnel and junior advisors handling much of the data gathering and implementation work.

2ND PROGRAM: FLAT FEES, CUSTOMIZED TO TIME REQUIRED. Even then, clients who desire and need more extensive services, such as municipal bond selection and due diligence, would be directed to a different platform in my firm, where the fees are necessarily higher. Fees would be established as a flat fee, but based upon an estimate of the time necessary to conduct due diligence and/or otherwise properly advise upon the assets, or address more complicated issues. This is essentially my current program, which involves personal visits to clients at their home each year. (All my clients are on the East Coast of the U.S.). The minimum under this program for new clients might be changed to $500,000.

3RD PROGRAM. Hourly fees only, or perhaps two or three levels of flat fees (depending upon complexity of financial planning needs), for those who only need 2-4 hours of financial planning guidance. As an experienced financial planner, I can provide this advice by developing an “action plan checklist” as the conference proceeds. This typed document might also identify topics for future meetings (and annual checkups would be encouraged). This is not my desired manner of engagement of clients, but for some clients who are saddled with debt or just starting out, it is likely all they need and can afford. This program might be offered only to clients with less than $300,000 to invest.

I would note that many practice consultants suggest raising minimums, and getting rid of small clients altogether. However, as professionals I believe we have an obligation to provide services to all. Even a person who walks into a firm with $1,000 to invest deserves, in my opinion, advice which points them in the right direction (i.e, establish a cash reserve, pay down certain debt, then fund retirement accounts where a match occurs, then … etc., etc.) – even if the firm does not provide those services itself. Such clients can also be directed to use software such as YNAB for personal budgeting.

In essence, I don’t believe there is any perfect fee model. Commission-based compensation (if the commissions and other compensation do not vary depending upon the recommendation made) might be acceptable, as will be hourly fees, flat or fixed fees or retainers, or a percentage of assets under management approach. Or some combination of the foregoing. As the needs of various clients vary, so should our approach to compensation structures, in order to adhere to our professional obligations to keep the best interests of the client foremost, while ensuring professional-level compensation for ourselves.

Lee Pence

Lee Pence

August 9, 2013 — 1:30 PM

Very Good and articulate argument. I would like to discuss further.

Maybe we could write a paper together. I will be in touch. I just returned form a business trip and am trying to get caught up with paperwork.

Thanks.

Lee Pence <a rel="nofollow" title="R">CFP</acronym> </a>

Bill Hayes

Bill Hayes

August 15, 2013 — 2:48 PM

Ron,

Your article raises some interesting discussions. Perhaps the most important one is where the profession is headed with regards to compensation.

While your actions with clients with less than $500K in truly commendable, it will not support the “profession,” or the “professional” for very long, and does create significant hurdles for those firms unable to reach the clients that you have been able to amass. After all, many in this profession are looking at this path as a full-time endeavor and not a supplement to teaching or some other Picasso like income stream, as perhaps many in the GPN network are inclined.

Also,this is not a situation where there are infinite clients with wealth over $500K. Perhaps this is why you note, “But more changes might be forthcoming in my offering. I am considering offering three current programs,” all of which seem to infer more income.

I would also point out that attorneys, and their practices, are not “surviving” in this current economic environment where Picasso talent is not transferable versus a knowledge based profession that is clearly easily accessed through the internet and in some cases is being supplanted currently by knock-off barristers. ( See…... http://www.forbes.com/sites/forbesleadershipforum/2012/05/08/why-more-law-firms-will-go-the-way-of-dewey-leboeuf/)

As an attorney, surely you understand the complexities of the legal world better than I do. However, coming from a family of generational lawyers the profession is not expanding as it has in the past and I would offer that compensation on an hourly basis is part of the reason.

The same can be applied to GPN. Having met the dynamic Sheryl Garrett, I believe she has the strength to move her firm forward, but I am concerned that the model is unsustainable over time. Recently, the CFP Board announced a very large and directed push to move more individuals into the profession. Obviously, more CFP Professionals will have significant impact on the profession as did the large number of law school attendees in the 80’s and 90’s (perhaps you were one of them) and the dramatic decrease in enrollment at law schools in the past decade.

My fear is the progression by both the profession, the CFP Board, and firms like GPN to an hourly fee practice is misguided. One has to look at the tyrants of the Financial Services industry to look for clues on this issue. While every player provides some sort of AUM model to garner profitability. The idea of an hourly fee has been seldom embraced.

While I concur with the often quoted conflict with regards to mortgage versus investment and therefore income to the professional, all other models seem ripe with more conflict than this.

It is not that I dislike the notion of hourly charges. It is that the economics of this compensation model has already shown its vulnerability within law practices. Given the stated objectives of the issuers of credentials to increase their numbers dramatically, is not a similar outcome inevitable and not avoidable.

Economics is a wonderful teacher here. Supply and demand in its purest sense has already shown that to be true in the legal profession. If the number of financial professionals charging hourly fees blossoms, couldn’t the result look much like the legal profession? Doesn’t that also damage the financial profession as individuals are no longer able to earn the necessary wages to sustain their professional existence?

This slippery slope is filled with other examples where supply and demand always triumphs. For example, can I sell you a tulip bulb?

Bill

Bruce Porter

Bruce Porter

June 11, 2014 — 7:09 PM

Our RIA firm, SMB Financial Services/The Retirement Income Center (Lake Oswego, OR) works primarily with referrals from CPA’s. We want to accept all the referrals we receive from the CPA’s but sometimes there are not enough client assets to make it practical to create a business relationship on paper.

We solve the “limited means’ client problem by educating them on a pro bono basis, We typically spend a brief appointment educating them on what is available to them on a no-fee or low-fee basis, and then direct them or help them set up their own retail internet account with some low cost recommendations. It’s our way of giving back.

Bruce Porter


Mentioned in this article:

Garrett Planning Network
RIA Set-up Firm
Top Executive: Sheryl Garrett



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