Arbiter of Reasonableness: What is Reasonable & Who Gets to Decide?

In our last post, we talked about the Department of Labor's newly launched Fiduciary Rule and what it means for you. We also raised another issue that isn’t getting much coverage: in a world where everyone is forced to charge on a fee-only based system, and those fees are required to be “reasonable,” who decides what is reasonable? 

It turns out, a fiduciary can act in your best interests, but still charge too much. Sometimes, WAY too much! In addition, we’re concerned that what financial services companies consider “reasonable” fees may start to increase as broker-dealers now following the fiduciary standard seek to recoup lost commissions revenue. Reasonable fees are generally deemed to be around the industry average of 1.00-1.25% of assets under management (“AUM”), depending on total investment amounts. (See the figure below for an illustration of this.)

Source: Advisory HQ 2017 Report on Advisory Fees and Costs

The problem with this assumption is two-fold.

First, this range is antiquated and has not adjusted for the current environment. As returns on money markets, bonds, and other fixed income based assets have come down over the years, Advisory fees have actually gone up according to leading research firm PriceMetrix.

The second problem is that “reasonableness” has historically been defined by, and interchangeable with industry-average. In other words, the financial services industry itself has been the arbiter of reasonableness. That’s right, the industry that is incentivized to make as much profit as possible is the same group that gets to determine what is reasonable. So while the fiduciary rule is a nice step in the right direction, it doesn’t go nearly far enough. Investors not paying attention are still likely to lose large amounts of money, just now in the form of annual fees instead of commissions.

Keep in mind this does not even include the expenses associated with investment funds in your accounts, or any transactional costs. If you think that’s too much – and you should – what are your options?

We believe that in the future, clients’ expectations should drive down the industry average AUM fee, and rightly so. There’s no surprise that what we advise you to seek is what we offer: transparent, low cost, fiduciary investment advice. First, look for a fee-only advisor that acts as a fiduciary at all times, with all of your money. Remember that the new rule only addresses retirement accounts right now. So when it comes to any non-retirement money, including college savings, inheritance, etc. most Advisors do not need to act in a Fiduciary capacity still. Second, look for an advisor that is dedicated to transparency, who will candidly discuss with you how she gets paid and how that impacts your investments. The more forthcoming an advisor is with you on these matters, the more likely she is to be truly operating in your best interests.

Finally, look for an Advisor with a lower cost structure. Many firms have no flexibility when it comes to their AUM rates – these may tend to be part of big banks or franchised by a larger corporate entity – but some firms do. Ask to see the Advisor’s fee schedule and ask whether there’s any flexibility in those rates. Our clients prior to arriving at Action Point almost always paid at least 1% with many between 1.20% - 1.30%. At Action Point, every client pays less than 1% for investment management. We pro-actively seek to set each client’s fee as low as possible. When compared to the “reasonable industry averages” we can typically offer fee reductions of up to 20-40%!

Of course, lower cost cannot be the *only* thing you consider. Investors can and should be looking at both reasonable cost and value in exchange for cost.

At Action Point, we believe the future is now. We are dedicated to a transparent, low cost fee structure that’s always well below industry average, regardless of your investment balance. We charge less because we can, and because it’s the right thing to do. We are all fiduciaries, all the time, which means we’re always working in your best interests and with no commissions on investments, ever. We want to help you enjoy your life and save responsibly for the future.  Contact us today to find out how.