Distinguishing Investment Management from Financial Planning

One of the things I found vexing about the financial planning business is the assets-under-management model.  Most fee-only financial planners charge some percentage of the assets they manage, and for that payment, they will manage a portfolio of investments as well as provide comprehensive financial planning services.  The vexing part is this: the fee they charge, if it’s just for investment management, is generally outrageously high.  But that’s not what they are really charging for.  They are charging for the portfolio management and the comprehensive financial planning, which encompasses everything from helping clients optimize taxes and take maximum advantage of tax-deferred or advantaged savings opportunities, helping them navigate employer benefit plans, review their insurance, manage the estate planning (usually in conjunction with attorneys) and work with their accountants.

But for all the theoretical transparency of the fee-only model – there are no hidden commissions or such – this still obscures the issue of what you’re paying for.  Since the fees are scaled with the investments manage, rather than with the services provided, it’s impossible for the clients to know just how much is paying for investment management and how much is paying for the comprehensive financial planning services.

And it’s clear that the industry itself often can’t figure out one part from the other.

In this article from May, 2012 in Forbes, this is quite apparent:


There are shops who are nominally financial advisers (note that “financial adviser” is a generally meaningless term) whose primary product is low cost investment management and nothing but that.  Betterment and Wealthfront both let folks fill in a risk questionnaire they come up with an asset allocation, and will invest your money according to their investment plan, including rebalancing, etc, for as little as 0.15% or 0.25%.  The thing to keep in mind is that they are only doing the asset-allocation and investment part.  If you need all the other services that a financial planner provides, you’re on your own.

So the back-and-forth in the article is entirely false, but seems real because they are comparing apples and oranges.  A full financial planning service may charge a much higher percentage of assets under management for what may appear to be the same thing – investing your money for you and monitoring and managing that investment – but the low cost guys are really doing only that part.  And that’s refreshing and honest, actually.  It opens up the market for low-cost investment management to folks who don’t have the much larger amounts that a typical assets-under-management shop needs to charge to cover all the services.  But that leaves those folks who go with one of these a la carte investment shops without the real value add that a financial planning or wealth management shop provides — all the services besides the investment portfolio management.

In fact, places like Wealthfront and Betterment may well be a perfect complement to the type of work that Meyers Wealth Management does.  While we are happy to manage a portfolio on an ongoing basis and for a percentage of assets, most of our work and most of our clients are primarily interested in the other stuff.  We are happy to have clients manage their portfolios on their own (and provide a written plan for them with asset allocation and even specific securities recommendations) – or if they want to use a shop like Betterment or Wealthfront to manage the portfolio (at least the part that’s not in their employer’s 401k plan), that’s just fine, too.

But when it comes to the bigger picture, things like finding opportunities for self-employed folks to set up SEP-IRAs or Solo 401(k) plans, making sure you’re saving enough to eventually retire, helping you figure out how much you can afford to spend on a house, how best to save for college for your kids, how much life insurance makes sense for you – these are all the things that the no frills portfolio management shops cannot provide, and we hope they’ll acknowledge that the other shops provide those valuable services and expect to get compensated for it.

The idea of un-bundling the portfolio management from the financial planning is very attractive.  It opens up the possibility of even more transparency in an industry which has a history of hiding costs and confusing clients.  This is great news.  Now, perhaps, they can stop wasting our time with apples-to-oranges comparisons and instead let us get on with what we’re here for – helping our clients in the best ways we can.



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