September 06, 2019

For all you locksmith buffs out there, I need to apologize. This really isn’t (for the most part) about locksmiths at all. I want to talk just a little about the cost of financial advice as it relates to the value received by the end user, the client. You’d like to think it’s pretty straightforward, but unfortunately that’s not always true – that’s where the locksmiths come in. All things being equal, paying less is always better, but all things aren’t equal and there’s the rub. You can pay very little and get even less than you paid for and you can pay a fair amount and get value far in excess of the costs. In the next few paragraphs, I’ll do my best to summarize my views on cost and value – you can decide what to take from that.

Comparing costs and value in financial advice is an increasingly popular topic both inside the industry and in the regulatory environment. Comparing what two things cost, however, is not the same thing as knowing what they’re worth. I wrote a post a while back about my view of good advice and what it’s worth that’s a primer on this topic. In financial advice, because so much of what you receive is intangible, it’s often difficult for those that don’t work in the industry to discern differences in quality and value.

I’m not going to harp too much on the differences in types of compensation – assets under management fees (AUM), commissions, planning fees, etc., because that’s all in the previous post, but the fact that there are so many ways ‘advisors’ can be compensated is a big reason why there’s so much confusion in the public and controversy in the industry. Just take a common 1.0% AUM fee as an example. It’s probably the most popular way advisors have been compensated in the last decade, but whether or not it’s a good deal is hardly black and white. What are you getting for the 1%? Financial planning, estate planning, tax-planning, withdrawal management, protection analysis, asset management? How much money do you have invested - $50,000 or $5 million? A 1% AUM fee for someone who has $50,000 who’s receiving comprehensive financial planning and asset management services, to me, is an exceptional value. A 1% AUM fee to someone with $5 million that’s getting a cookie cutter asset allocation portfolio and nothing more wouldn’t fall into the bargain category, in my opinion.

Beyond that, who is it that you’re dealing with? Another industry controversy surrounds who calls themselves a financial advisor and who should be allowed to. The truth is, if you take a lump sum of money to someone who’s only licensed to sell insurance, it’s highly unlikely that they’re going to tell you you should take your money to a financial planner to have it managed in an inexpensive ETF (exchange-traded fund) portfolio. So it’s important to understand what your advisor’s qualifications are so you can decide what type of advice you’re getting.

What am I getting and who am I getting it from are important, what else? Let’s take a detour and talk about locksmiths, because who doesn’t want to talk about them? We’ve all had that experience where we or someone we know has locked themselves out of their car or home. Let’s turn this into an unofficial poll, where you get to choose the locksmith. Let’s also raise the stakes – you’ve locked yourself out of the car and it’s twenty degrees outside (Fahrenheit, as clarification for the many Brits who will inevitably read this) and your coat is also in the car. Locksmith A shows up in 10 minutes, pops out her toolkit, gets you into the car in 30 seconds and says, ‘that’ll be $150.’ Locksmith B, on the other hand, shows up in 30 minutes, forgets part of his toolkit, has to get online to find a ‘how to’ guide, and after 2 hours of struggle, gets you into the car. He then says, ‘that’ll be $50.’ Who got the better deal?

The answer is obvious to me, but it’s not rhetorical, I know some *cough* fiscally conservative folks who would choose frozen fingers and option B. The point, however, is that oftentimes, our tendency is to equate effort and time with value. So many of us would feel cheated by the first locksmith, when I could easily argue that she provided more value – we got in the car, we didn’t have to wait, we didn’t freeze. That’s good right? Right?

This situation is readily applicable to financial planning, as the more experienced and educated an advisor, the quicker they’re likely able to assess situations and the more effortless they look doing it. But unless you’ve deliberately chosen an hourly financial planner, what you’re usually paying for is not their time, but the quality of their advice and their experience. This can often be quantified, as it is when it relates to tax planning, for example, but it’s not always. Ultimately, you get to decide what you want and how much you pay for it, but I believe it’s best to view it from a value perspective versus a cost perspective.

Good tax advice, suitable asset allocation, appropriate asset location, proper withdrawal management, debt management, behavioral coaching, and all of the things that planning can entail could save or make you hundreds, thousands, tens of thousands or more over the course of a multi-decade timeframe. If you don’t want to pay for it, don’t. If you can get exceptionally high-quality advice for next to nothing, do it. Just don’t make the mistake of equating cost and value, because the money you save in the beginning could cost you so much more in the end. If you’re the kind of person that would brag to your friends about standing out in the cold for an extra couple of hours to save $100, don’t let me stop you. If you’d rather just pay a little more so you can get in the car and go home, don’t feel bad about that if it makes your life better. If you’re wondering how this could be the last sentence because you don’t think I’ve finished my point, then you don’t get it and you should read my next post about gas station sushi.


This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  09/19