Have you noticed how the internet is filled with articles and commentators bashing advisors? Granted, parts of the advice industry have a well earned bad reputation. I get it. I've written about it in previous articles.
As I read articles from FIRE bloggers, I noticed a consistently negative attitude toward the financial advice community that seems more intense than in other places. I saw it first hand at a conference for the personal finance community in September. FinCon gathers anyone interested in personal finance together in one place. Their tagline is Where Money and Media meet.
What I found interesting about FinCon is there were many sessions geared toward financial advisors. Ironic, isn't it? The organization that gathers all people personal finance together has members who speak against a good chunk of the participants.
Let me be crystal clear. I'm a fan of what the FIRE bloggers advocate. In my articles, you'll often hear the same things from me. They are simple, sound financial concepts – spend less than you earn, save and invest the difference, and minimize or eliminate debt. Who could argue with these? They are foundational principles of personal finance.
So, if many advisors and I are in violent agreement with the principles, why all the negativity?
That's what I want to talk about. I can narrow it down to one view of our industry. One thing bloggers seem to hate universally is how we advisors get paid. There is some legitimacy to it. There's also a lot missing from it.
We'll flesh it out here.
BackgroundI talked briefly in the introduction about the principles of FIRE. There is nothing to argue about with these. They are personal finance 101 lessons.
Sadly, they are not part of high school or college curriculums. What we learn about them we learn on our own. Or we learn them from parents who taught them to us, either by actions we observed or by them teaching us.
One of the criticisms of the FIRE blogger is they are out of touch with the ordinary person. Many of the originals came from the tech industry making six-figure salaries. Those who had working spouses can double those salaries. At the very least, they added a significant additional income. Many lived in a low cost of living area. That made it even easier to apply the three principles of FIRE. There is a lot of truth in this view. However, there's more to the story.
The principles of spending less than you make, saving and investing the difference and controlling debt apply no matter the income. Is it more comfortable on higher incomes? Of course. The argument is that it shouldn't matter. Most of the time, you hear this from folks who have the six-figure salaries living in lower cost of living areas.
I've read stories of people achieving financial independence (FI) on average salaries. The story I cited in a recent blog post was of a breadwinner of a couple who, at retirement, made just over $53,000 a year. They accumulated a net worth of $2,000,000. How did they do it? They lived and applied these three principles. There was no debt. Both houses they owned were free and clear. Everything was paid for with cash (except the mortgages, which they paid off early). They automated their savings. That's how they did it.
The problem is not everyone has the discipline or the desire to implement these things. They should. The reality is that many don't.
Bull vs. bearThese young investors have never experienced a down stock market. All they know is the ten-year bull market that's helped them accumulate whatever wealth they enjoy.
I hear the same things regurgitated when I ask them about a bear market. You know the mantras – “I'll buy more when they go on sale” or “I'm young and have plenty of time to recover” or “why would I want bonds in my portfolio at such low rates.”
I heard these same comments in 2000, and again in late 2007 and early 2008. In the last crisis, the consensus was that the market had changed; that technology reduced the chances of a “fat tail” event. The Fat tail risk is that which falls outside of the standard statistical probabilities. Normal bell-curve distribution says that risk falls within three standard deviations of the mean. That covers 99.7% of the risk spectrum. Seems pretty safe, doesn't it? I'll take a 0.03% risk anytime.
Here's the problem. The last two market crashes (for lack of better terms) fell outside the standard bell curves. They caused severe damage to people's lives. Why? Many had adopted a “this time it's different” mentality. When we fail to look at market history and previous bear and bull markets, we get fooled into this kind of thinking. In my view, we've entered that territory again.
We're suffering from recency bias and confirmation bias. My recent article speaks about these and other biases that impact how we make investment decisions. I see striking similarities in my younger investor friends. They have confidence (or worse) they know how they will react. And they're sure they will remain calm during a crisis. I hope they're right.
If you're counting on returns of the last ten years to continue going forward; and if you haven't planned for any other scenarios, I'm afraid the dream of early retirement and financial independence will disappear.
If you've been wondering when I was going to get to the point, it's now.
I'll illustrate by telling a story that happened at the FinCon conference. I attended a panel discussion moderated by one of my favorite bloggers, J.D. Roth of Get Rich Slowly. The discussion revolved around where the FIRE movement is now vs. when it started. When it came time for the Q & A, toward the end, a gentleman from Australia (not an Australian living here. He came from Australia) asked an intriguing question. Here's what it was. I'll give you the gist of his question since I didn't write it down or record it. It went something like this.
There seems to be a tension between the FIRE bloggers and the financial advice industry. Do you sense that? If so, why do you think that is?”
Again, the quote isn't verbatim but the meat and bones of it are accurate. As the panel looked at each other trying to avoid answering, Mr. Money Mustache said he'd give it a shot. Many bloggers consider Pete, of Mr. Money Mustache, to be the father of the FIRE community. Pete is the stereotypical FIRE blogger (media image) who worked in the tech industry and retired in his early thirties (I believe 31). He has over 800 articles on his blog. His articles are extremely well written. He takes issue with consumerism and how most of us live beyond our means as a result of it. I do not argue with Pete's work. I thank him for getting out the message of FIRE. At least the FI part.
Pete's response started with a gross stereotypical reaction that went something like this. Financial advisors want to tell you-you'll need $ten million o to retire, and you should retire on the same amount you had when you're working so they can manage your money longer and continue getting paid. Again, this is not an exact quote, but it fairly represents his view.
Mr. Money Mustache and me
That was the last question before the session came to a close. I quickly approached the front of the room to have a word with Pete. After waiting my turn, I shook his hand and introduced myself. Since I'm a relatively new blogger (less than one year at this writing), he had no idea who I was. After the brief introduction, here was my challenge to Pete.
What you described to the group about financial advisors behavior with clients is something that I can honestly say I've never done in my thirty-year career in the industry. It was a gross exaggeration and shed an inaccurate shadow over good financial advisors in the room like me and many others. You have a vast platform you've built. I admire what you've done. But when you get in front of people and make that kind of inaccurate, biased statements toward an entire industry, your listeners take it seriously.
“The truth is, Pete, that the FIRE community makes up a minimal subset of the American working population. It's probably less than five percent. I love that it's growing and want it to continue. But what are the people who are not inclined, for whatever reason, to pursue FI, to manage their own money, or to make the kinds of decisions you advocate supposed to do for help? If they here you speak like you did today, with your reach, it could keep people from seeking help.
I'd love to see you use your platform and your voice to educate your tribe or others who may come across your blog, on how to find the right kind of advisor if they seek help. Help them find fiduciary, fee-only advisors who can walk with them and teach them the things you advocate.”
Pete listened to everything I had to say and told me he should probably write a post to that effect. I appreciated his willingness to hear and consider what I had to say. It says a lot about him as a person.
I hope he will follow through on the article. If he doesn't, I hope he will think differently before making the kind of blanket statement he did at the conference.
Fee-only is often a misunderstood term. In its purest form, it merely means that advisors only type of compensation comes from fees their clients pay directly to them (my firm, Leamnson Capital is a fee-only advisory firm). The disconnect in the FIRE gang comes from the definition of fee-only. Fee-only can mean a flat fee, an hourly fee, a subscription fee or assets under management (AUM) fee.
FIRE bloggers hate AUM fees. Advisors charging an AUM fee take money directly from the investment account as their compensation. The percentage that gets consistently thrown around and hammered by bloggers is a 1% fee. That's the fee often cited by mainstream media as well. They will run the numbers on how much that cost and, to make it even more dramatic, add in higher than usual mutual fund fees to drive home the point.
Many other advisors and I have a tiered fee structure that lowers as assets grow. Many advisors charge a much lower fee than that 1% regularly used to bash us.
The math in their examples is right. I would never try to argue that an AUM fee structure doesn't cost more. What's missing in the argument is the value for the money. The personal finance blogosphere seems to have a disconnect on what a financial advisor does for their clients. Their arguments limit the service to investment management only. If that's all I did for clients, they would likely fire me and hire a robo firm. In my case, and in most other good advisors, our role is much broader.
Personal Capital, a firm that virtually every finance blogger I know recommends and with whom they have an affiliate relationship, has advisors attached to their clients as well. Most bloggers don't use them. They do it themselves. But here's the funny thing. Personal Captial advisors get paid under an AUM fee that starts at 0.89%. I've not heard one blogger say anything negative or even mention the advisors AUM fee at Personal Capital. I've never heard them mention that they have advisors (except when challenged).
When bloggers argue about the conflicts involved in AUM fees, it's always the same argument. They use the example of someone wanting to pay off a mortgage out of money on which an advisor gets paid an AUM fee. Does that represent a conflict? Absolutely. You know the difference? My business structure (registered investment advisor) requires me to act in the best interest of my client.
That's another layer of the fee-only model that gets conveniently left out of the discussion. So, in this scenario, if it's in the client's best interest to pay off the mortgage, I would recommend that's what they do. I'm bound to do that by the business structure I chose when setting up my firm. I would do it anyway because that's how I work with clients.
Bloggers who get paid an affiliate commission recommending products and services are under no such obligation. They can bash the AUM structure while ignoring the fact that the very firm most of them recommend has advisors who get paid the same way. Did I mention that Personal Capital manages over $7 billion in assets under this fee structure?
Bloggers simply put a link at the top of articles saying we may get a commission and include a link that takes visitors to a full detailed disclosure on another page. I have one on my blog too.
As a blogger, I'm under no obligation to disclose things like Personal Capital's AUM fees while I'm denigrating that very same fee structure from others. As a financial advisor, I do have to disclose those fees.
See any problem here?
An exception to the view
Another member of that panel was the man who runs the Physician on Fire (PoF) blog. Like many bloggers, Pof writes anonymously. Until recently, I couldn't understand why someone would remain anonymous. I've since learned it's to protect their careers. Many employers don't look kindly on outside business activities. PoF is a very widely read blogger. His anonymity allows him to blog more freely and not risk his employment. His blog has birthed many other physicians blogs. Their voices are important ones.
After Pete finished his comments on the question about bias against advisors, PoF gave his response. He said he thought everyone should manage their own investing and finances. And I agree with this view. He said if people feel like they can't do it on their own, they should work with a fee-only advisor. He went on to describe what fee-only meant to him. It was not an AUM fee. Instead, it was either a flat-fee, subscription-based, or hourly fee. And you know what? I'm fine with that view. He didn't feel the need to speak disparagingly against advisors. He told people his views on the type of advisors he would recommend to those who aren't DIYers like them.
That's what I was asking of Pete at Mr. Money Mustache. Use your platform and voice to show people where to get the help they need. Teach them the questions to ask. Point them in the right direction. That's what PoF has done on his blog. He's gone one step further and put an advisor recommendation page on his website. Hey. And I'm putting this list out there even though I'm not on it. If you need help with your finances and investing, I want you to be able to find it, whether it's another fee-only fiduciary advisor or me.
I've said some things about the FIRE team that I know will ruffle the feathers of many of my blogger friends. Know this. I love the principles you advocate and your examples of how you implement them in your own lives. Keep it up. Tell your stories of financial successes and how you did it. Keep spreading the word.
I'll ask of you what I asked of Pete and what I see PoF already doing on his blog. Make space in your viewpoint for those who need help sorting out their finances. Take the time to learn ab0ut what good advisors do for their clients and the value they provide. It's much more than managing investments. Understand that not everyone will live, think, save, budget, invest and live the way you do. That's OK.
Your movement is healthy, growing, and vital to anyone wanting to learn how to handle their money. Many of you state in your About pages or on your sidebar intro boxes that you're in it to help people do better. I am too. It's a noble calling and mission. Please don't let it descend into a negative, condescending view of those who don't live this way.
People have a choice in how they operate. They can do it on their own or hire an advisor to help. People can choose what kind of advisor they want and how they pay them. In my and many other advisors practices, we give clients the choice of how to engage with us – flat fee, hourly, subscription and for those who want investment management, AUM.
Use your voice to help those who don't for whatever reason want to do it themselves. Your community will grow even faster and have a more significant impact than it does now.
Now it's your turn. Tell me what you think.
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