An Entrepreneur Can’t Be a Wirehouse Financial Advisor

I can’t be a wirehouse financial advisor.

I can’t do something I don’t believe in.  I can’t make money for making money’s sake.  I am too smart and would simply feel too guilty for wasting my mental and emotional energy doing something so completely self-serving.  Maybe if I had children I could do it, but, as of right now, I don’t.  So I can’t.

But what don’t I believe in?  After all, people need financial advice.  They need to be advised how to invest their money.  They need to be informed about history so they have some inkling of what the future might look like.  But how much is this worth?

I know plenty of people who charge 2% (or more).  Two dollars for every hundred every single year.  In fifty years, the financial advisor will have taken it all.  Except he won’t because investments grow over time.  Grow?  Or inflate?  Both.

Let’s say inflation runs three percent and Mr. financial advisor takes two.  That’s five cents of every dollar you own gone.

But wait, I haven’t even told you about the money management fees.  That will cost you another .5-2%.  …I thought that’s what the financial advisor does – manage money!?  Well, not exactly.  The financial advisor picks the managers.

The vast majority of people don’t even understand this double layer of fees.

In a world where debt was being rapidly accumulated, stocks were getting 12% yearly returns, incomes of investors were rising, and financial products like mutual, fund of, and hedge funds were being invented, it was all fine.  But in the current world,  12% returns have not been the norm.  Is 4% to manage money appropriate in this world?  And don’t forget to consider that this past boom has brought many smart and talented people to the business.  People that should have been competing on price (or getting engineering or computer science degrees). Whether or not Bill Gross’s new normal is reality, the bloom should be off the financial advisor rose.  THE MONEY MANAGEMENT MACHINE TAKES TOO MUCH MONEY FROM INVESTORS.  FAR TOO MUCH.  I’ve now seen it from the inside out.

2% is the absolute, outside maximum that an investor should ever pay for money management.  This means account fees, advisor cost, underlying fund management cost, everything.  Quite frankly, I think over time that number should get to .5-1%.  But wirehouses seem to deem it appropriate to continue raising those fees, or at least penalizing those advisors who don’t raise the fees for them.

I have been right about a number of things this year.  By and large, my clients have been the beneficiary of some pretty decent advice.  And I have had to spend a ton of analysis time doing it.  (A lot of the “expert” advice doesn’t understand hardly anything, much less enough to make qualified predictions.)  But should I get 2% of all their money for this?  I don’t think so.

I think the future of the business is hourly compensation.  The future of the business certainly isn’t a wirehouse.  Whatever the case may be, the future of me in this business isn’t at a wirehouse.

Maybe I’m wrong.  Maybe I’m being too stringent.  Maybe I haven’t helped enough people – really, truly helped them.  Maybe I undervalue how much financial advisors contribute or how much I contribute as a financial advisor.  But I can tell you that, for whatever reason, it doesn’t feel right.  And I’ve tried to make it feel right.  I’ve watched clients ecstatic because they have a new financial comfort they have never had before.  I’ve listened to clients say I was right and they were wrong and that meant more financial freedom for them.  But it still doesn’t feel right.  So, at this point, I’m trusting my gut and preparing to move on.