Financial Services Fee Salience: Just Because You Don’t Notice, It Doesn’t Mean It’s Not Costing You Money
Consider the following data points;
Flat fee for service is the best way for consumers to pay for financial planning and investment management
Less than 5% of financial advisors offer a flat fee for service
90% of advisors charge a percentage of Assets Under Management (AUM)
There seems to be something out of whack there, doesn't there? It would appear that a clever entrepreneur would seize the opportunity and disrupt the financial services industry, right?
But the reality is that advisors who charge a flat fee for service struggle to retain clients when compared to advisors who charge a percentage of AUM. Why? The answer is complex, but two factors loom large. One is inertia, the tendency of an object at rest to stay at rest and the other is salience, in particular, fee salience.
The Oxford Dictionary defines salience as “the quality of being particularly noticeable or important; prominence.” Flat fees that are paid directly to the advisor for services performed come under that definition -- in most cases when your advisor charges a flat monthly or hourly fee, you have to write a check or charge your credit card. Either way you are very aware that you just made a payment.
AUM fees are deducted from the investment and reported on page 3 of the mind-numbing statement that is delivered electronically to the portal on your advisor's website. I would estimate that 7 out of 10 clients that I work with, who have money at an AUM advisor, have never seen that fee and do not know how much it is.
Imagine you have a $1 million dollar account at Merrill Lynch, and they charge you 1% per year. That means you are paying $10,000 per year, every year. It never appears on your household budget and most people have no idea what they are getting in exchange for that fee. Is there anything else that you pay $10,000 a year for that you are not aware of? I’ll wait……
Michael Kitces, guru for all things financial, wrote a great article 10 years ago discussing how fee salience is a real problem for firms who want to deliver advice for flat fees. In his article, Kitces says this about the flat fee advice model “In the end, what may be best for consumers overall to keep financial planning costs reasonable may be worst for financial planning businesses that wish to grow.”1
When you add the problem of inertia, “why do we charge 1%? Because we have always charged 1%”, you can see why this industry has been so hard to disrupt.
I started Westward Planning Group (WPG) at the end of 2019. I have had a very rewarding career in the financial services industry, but I knew there were things I would do differently if I had the chance to start something from scratch. I wanted WPG to be a place where you could come and get the benefit of my 30+ years of experience and be confident that I had no ulterior motives, no axe to grind.
I would charge a fair price and give you my best recommendations. You are free to do or not to do whatever you want. It is not that I don’t care, I do, it is just that my compensation is not dependent on you moving your money from one custodian to another or buying a product. One thing I did not realize when I started the company was that the nuanced differences in the ways that advisors get paid would be so hard to explain. I think I have finally figured out a fair pricing structure, and for transparency it is posted on my website. Read it here.
I had some other realizations as well. Building the firm I wanted has been the most satisfying benefit. For me, it’s about taking on only the number of families that I can help, not about growing a big business. I’m going to stay small, control my time and enjoy my life, and my mission is to make sure my clients can do the same thing.
I also realized that not everyone needs to stay with an advisor forever. Some will stay, sure, and I think I offer compelling reasons to stay, but some will learn what they need to learn and then go off on their own. I am OK with that too.
And I will continue to be transparent about my fees because you should always know what you pay and feel like you got what you paid for.
1.“The Salience of Financial Planning Fees – It’s Not Just About How Much You Charge, But How You Charge” Michael Kitces, Nerd's Eye View, June 7, 2012
