I’ve been an advisor for over a quarter century and I’ve enjoyed (almost) every minute of it. Like so many others who do what I do, I have a passion for solving problems. On weekends, that means doing sudokus, crossword puzzles (both traditional and cryptic) and the like. By day, however, I enjoy helping people with their financial problems – including those that they don’t even know they have. One of the great joys of my work is that I have, over time, become a bit of a thought leader within the industry as a result of my media appearances, books, articles and speaking engagements. This wrinkle gives me the added perspective of being able to interact with many other excellent advisors from across the country. I think the large majority of them really are very good and I agree with most of them on most things – but there is one topic where I consistently disagree with many of my peers and I’m astounded at how many advisors change the subject when I bring it up.
The matter of disagreement is product cost. I think it is extremely important, but it seems many other advisors don’t. Allow me to be perfectly clear about my position: my view is that product cost is a form of ‘negative return’ and that it should be minimized and managed to represent only what is required to gain access to a desired asset class or strategy. My view is that added product cost is seldom worth it.
There’s a term that comes from Latin that is used extensively in economics courses – cetreris paribus. It translates into English as ‘all else being equal’. The evidence is extremely clear that a reasonable expectation for any product or strategy is the return of the benchmark minus the average cost incurred in gaining access to the product or strategy. If an asset class returns 7.5% before costs and one product costs 1.0% and another costs 0.5%, it is entirely reasonable to expect the return for the latter to be 0.5% higher than the return for the former. The difference between earning 7% and earning 6.5% can be massive over an investor’s lifetime. Financial planning best practices recommend that all associated costs be deducted from the return expectations that are set out. In the immortal words of the late John Bogle: you get what you don’t pay for.
I have lost count of the number of times my fellow advisors justify their existence without ever making any reference to product cost. For instance, they’ll compare themselves (favourably, of course) to robo advisors by talking about value-added services, perspectives, behaviours and strategies. Most of the things they say are usually true. What strikes me, however, is that it is also true that robo advisors cost considerably less. This is especially true for those advisors who insist on using high cost mutual funds and / or wrap accounts as the investment portion of their offering. My experience is that the advisors who are most likely to need an attitude adjustment are either MFDA registrants or IIROC registrants using wrap accounts. In many cases, the planning and advising work that they do is excellent, but expensive.
The thing that so few of them seem willing to acknowledge is their dogged resistance to low-cost products. It’s as though these advisors think the choice is between high-quality human advice using high cost products or more rudimentary robo advice using low cost products. It’s an article of faith with many of them. I remain dumbfounded.
Many of my fellow advisors are so determined to defend the money they make (i.e., the fees they charge), that they miss out on an obvious ‘win’ for their clients – the option to switch to lower-cost products. It would be much easier to defend your margin on the advice side if you could lower the cost on the product side. Clients pay both. I have yet to meet an advisor who is eager to lower their fee, but I am absolutely gobsmacked that so few of them are willing to switch to using low cost products. These are totally separate issues!
Here’s a request that I would make of any investor who is having an “ask tough questions” conversation with their advisor – like the ones that occur in the Questrade ads. Ask your advisor what she or he does to justify their fee. Listen respectfully. What you will likely hear is a laundry list that might include:
- Tax integration
- Financial planning
- Tax loss harvesting
- Estate planning
- Regular contact and meetings
- Pension integration
- Income splitting
- Retirement projections
I strongly agree that good advisors can add a great deal of value by doing these and a host of other things. I also agree with most of my peers that the things listed above are valuable services that offer considerable benefits to many who use them. Where I disagree – and where I respectfully suggest that you should, too – is in regard to product cost, which is something many advisors pay little attention to and seldom talk about. Why not ask if your advisor can simply continue to do all those things while using more cost-effective products and passing the savings on to you?
Advisors have been having the wrong conversation for well over a decade now. That’s because there are actually two separate conversations to be had. Many advisors would have you believe that your decision is only between holistic personal advice and basic robo advice. While circumstances will vary, I tend to agree with their perspective in most instances. There’s a second question, however. It revolves around the use of high cost products favoured by many advisors while perfectly good low-cost products (such as those favoured by robo advisors) are available. That, too, is a relevant consideration. On this question, I tend to agree with the robo people – cost matters.
The point here is that there are two independent decisions to be made here and that, until now, most advisors have acted like the answer to the first question leads inexorably to an answer to the second question. It does not. They are separate and unrelated. Advisors desperately need to recognize this, stop acting like quality advice and high-cost products are somehow connected and give their clients a real choice when the time comes to build their portfolio.