Legions of planning clients want to fire their advisers

May 24, 2019 by admin

The market has been on a decade-long bull run, the proverbial environment for a blind monkey throwing darts to build a good portfolio.

And yet, according to recent research, a high number of clients working with financial planners might prefer a blind monkey to the adviser they have.

It’s a shocking indictment of the state of the financial planning business, but also an indication that financial consumers may be their own worst enemy when it comes to finding and sticking with good counselors.

The recently released EY 2019 Global Wealth Research report – a worldwide survey of over 2,000 wealth management clients – found that one-third of clients have switched advisers in the last three years, and another 33 percent plan to make a change in the next three.

With financial planning shown by countless surveys and studies to be a calming influence that helps steer individual investors to superior results than they achieve on their own, this incredibly high rate of turnover is perplexing, because the bull market alone should have been enough to help ensure that customers were reasonably satisfied just getting something close to a market return.

Alas, returns are not really the reason why consumers are unhappy with their advisers.

Moreover, clients are ready to get rid of all stripes of adviser. The EY report showed that unhappiness ran the gamut, from clients who have big-money guys to up-and-comers saving with the local planner they met in town, to quasi-do-it-yourselfers who haven’t actually hired an individual but are working with a robo-advice online service.

It didn’t matter how consumers were getting their advice, an enormous chunk of them were unhappy with what they received.

As the author of two books on selecting and working with financial advisers, this highlights the empirical trend that has long been undeniable in the planning world, namely that consumers who say they want expertise, guidance and assistance when hiring an adviser wind up canning that helper when performance lags or they don’t feel like they are getting their money’s worth.

Nearly half of wealth management clients surveyed by EY were unhappy with the fees they are paying and do not trust that they are being charged fairly; the wealthier the client, the higher the level of dissatisfaction.

“There is a lot of dissatisfaction with fees and with service levels, and a lot of factors driving this desire to switch advisers,” said Nalika Nanayakkara, advisory lead, EY Americas Wealth and Asset Management, during an appearance on “Money Life with Chuck Jaffe.” “There’s no alternative to creating a goal plan and sticking to it, rather than chasing shiny new objects – options like fintech – or options and switching providers.”

The bigger problem is that switching advisers can have a much bigger impact on a portfolio than simply buying and selling investments. When you consider how studies show that individual investors make their stock and mutual fund moves at just the wrong time and wind up lagging the market as a result, think about how bad it can be when changing advisers and having the entire portfolio moved, shifted, re-shaped and re-positioned.

Moreover, many times a new adviser overhauls a portfolio completely not because it is in poor investments, but because it is what allows them to get paid. While they deserve to earn money for their efforts, starting the new relationship with moves that are cosmetic and costly rather than true improvements sets the stage for future disappointments.

Nanayakkara noted that consumers who identified themselves as having a high level of knowledge had gone far enough in their education to feel comfortable with how they were being charged, which improved their level of satisfaction with their advisers.

The moral of the story for consumers is to know how and how much you are paying, and what you are paying for.

Consumers are clamoring for advisers who charge flat rates and hourly fees and, increasingly, the financial services industry is responding, although it’s not always easy for someone of modest means to full-service financial help this way. On the flip side, traditional commission-based investments are typically what consumers want to avoid, fearing that they’re being pushed into things mostly to register the sale.

The middle ground is paying for “assets under management,” with the industry standard fee being roughly 1 percent, meaning that if you give an adviser a $100,000 portfolio to manage, they will charge $1,000 or 1 percent of that amount. Each year, their fee goes up or down in conjunction with the performance of the portfolio; if they double your money, their fee also doubles.

Consumer pressure and the evolution of lower-priced robo-advice platforms is starting to drive asset-based fees lower; over the next decade, expect the standard – especially for consumers with larger portfolios – to drop down to or below 0.5 percent of assets under management.

But before hiring an adviser, ask how they will be compensated. Get a complete explanation of how it works. If you don’t like the structure, ask the adviser if they work with any other payment plans; they may charge a very high hourly wage – because they would prefer the ongoing assets-under-management model – but you can decide the costs and structures you want.

Keep searching for advisers until you feel confident that you have someone you trust on all levels, from the advice they give to that they will deliver on their promises of advice and help, to what they charge. Better to put off hiring an adviser in order to find the right one, rather than hire someone and lack trust and be ready to uproot the whole portfolio again in short order.

“There is high demand for advice and planning,” said Nanayakkara, “but it all starts with setting the right expectations. The more you know at the beginning – as you start working with an adviser — the happier you will be with the results. It is worth it to take your time and find the right adviser and not be the person who is unhappy and wants to make a change.”

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Chuck Jaffe is a nationally syndicated financial columnist and the host of “MoneyLife with Chuck Jaffe.” You can reach him at itschuckjaffe@gmail.com and tune in at moneylifeshow.com.