What ARE You Paying For?

Thursday, June 15, 2017

By: Christopher P. Cline

Those darn robots.  They’re taking jobs left and right.  A couple months ago, The Wall Street Journal reported that the world’s largest asset manager, BlackRock Inc., is shaking up its “stock picking” business by relying more on robots than humans to make buy and sell decisions.  It’s doing so to capitalize on its dominant position in low-cost passive investments like ETFs.  Its actively managed equities business is being shaken up by job losses (including seven portfolio managers), pricing changes and an emphasis on computer models.  And no one in the Trump administration is coming to help out those displaced workers.

A month earlier, Journal columnist Jason Zweig talked up the benefits of “robo advisers” and target-date funds (which adjust their balances of investments the closer the investor gets to retirement).  He noted that “many people are making a mindful choice to invest mindlessly.”  Such automated advisers trim stock positions effectively as stock prices rise, keeping them at a predetermined level.  This algorithmic rebalancing may be as effective if not more so than that done by an emotional professional.  And automated investors charge a fraction of what a human investment advisor would.

All of which inevitably leads to the question, “why should I pay an investment advisor to do what I can hire an algorithm to do just as effectively and for less money?”  And the answer is that you shouldn’t, IF all you want to pay for is investment advice. 

The truth is that stock brokers and registered investment advisers aren’t earning their commissions or fees if that’s all they’re giving you.

So what else should you be getting for your money?  Two things: planning and continuity.  Planning should include cash flow modeling, asset protection advice, estate planning and tax expertise, all of which is typically described as “wealth management” (a term so overused it has become almost meaningless).

 With all of the advisors who claim to provide such comprehensive planning advice, the best way to tell whether you’re getting the real deal is to look at credentials and experience.  Does your advisor offer a team of experts (including Certified Financial Planners and former attorneys and accountants) who’ve seen enough to know real world solutions from good ideas in a book?  Realistically, one person with only a single designation can’t hope to provide comprehensive advice.

Continuity is even harder to find.  It means not only “bench strength” (that is, having enough people on staff to ensure than your needs are always met), but more importantly the ability to help you through all the financial stages of your life.  Can your financial professional not only provide you with planning and investment advice now, but also take over managing your affairs if you become incapacitated, administer your estate at your passing and administer trusts for your heirs?  In order to justify fees, the answer to all those questions should be yes.

The best place to find all of these services in one place is a trust company, or at least with an advisor who has a strong affiliation with one.  Not only do they provide all of the services described here, trust companies have built their businesses on the “fiduciary standard,” under which they must put the interests of the client (or beneficiaries) ahead of their own.  This means, in part, that they cannot recommend a higher-fee product when a lower one will do.  In addition, trust companies offer a comprehensive package of services that cannot be reproduced by an algorithm (at least not yet!).

So when you’re looking for financial advice, or assessing the level of advice you’re getting currently, be very clear about what you’re paying for.