Trying to fight the good fight

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Sometimes I come across prospective clients that want to work with me, but don’t want to be charged advisory fees.

Either they are the kind of people that have an aversion to being charged any kind of fees or they’ve had a bad experience, after being charged a lot of commissions, somewhere in their investing past.

Inevitably, I still want to convert them to my way of thinking. I will go through the whole process of why I believe an ETF fee based approach is the best way to build an investment portfolio, but much of what I say will go in one ear and out the other.

(Please note I’m generally wary of these type of people and may not take them on as clients, as I understand my approach may not be for everyone)

I also have clients that started out as fee based clients but they would always focus on the quarterly fees they were being charged; a fee based approach just wasn’t a natural fit for them either. In these cases, I would recognize this client trait fairly quickly (from my past experiences) and offer to move them into C share mutual funds instead, a much better fit for them.

Past Failures

I mentioned, above, that I had past experience dealing with clients that become more and more fee adverse over time. Well, let me tell you where I got it…

For a couple years, while I was working at Merrill Lynch, I used a hybrid investment model to build client portfolios. This approach attempted to combine the best of both worlds, combining fee based pricing with active professional management.

Unfortunately my timing was poor. This was during the lean market years, in the early 2000’s, when most everything was going down.

Clients would receive their statements, see that the portfolio went down in value and, then on top of that, see the fees they were assessed… something I liked to call the ‘double whammy’.

After a while, certain clients had had enough of this hybrid investment approach. For them, it was like pouring salt into the wounds, just a bit too much for some to handle.

The investor psyche

Remember the all important psychology of investors, that I’ve touched on in past articles. Human psychology 101 - Out of sight, out of mind. It’s a premise that helps to keep the mutual fund (and hedge fund) industry in business and thriving.

If people don’t see the fees on their statement, then they’re not so concerned what fees they are really being charged. I can talk about my fee based approach and the efficiencies it provides, until I’m blue in the face, and it’s not going to matter. I tell you, sometimes, it can be tiring trying to fight the good fight day after day, week after week, year after year.

*FACT*: There’s just a certain segment of the population that can’t handle seeing real dollars come out of their accounts. They want to be invested for the future but they’d prefer a different approach.

Sometimes you have to give them the best version of what they want. The approach that makes the most sense, from my perspective, is Class C share mutual funds.

A gone goose

Incidentally, I lost a fee based client last week (my first migration in a while) because of the fees she saw on her most recent statement. Her relative performance was fine, things were going well, in the context of her financial plan. But apparently she had a friend at work that was telling her how much money he was making trading stocks and she could be doing alot better.

During certain periods, like the current market, where stocks are moving fast, near all time highs, greed becomes a factor and a small segment of the client population lose sight of their long term objectives.

Anecdotally speaking, when I do lose a client, it always tends to happen near intermediate market tops or bottoms, when the emotions of investors (greed and fear) get stretched and occasionally snap.

I think someone once called it… irrational exuberance.

Incorporating a bit of philosophy

From my perspective, occasionally losing a client works as a weeding out process, a form of natural selection. I tend to believe the clients that see the merits of a fee based, financial planning approach are the ones predisposed for future success.

The ones that can’t stand the fees and believe they can do it on their own (having little real experience) are the ones (by and large) lacking the humility that’s a necessary component of long term success.

And then of course, I could always be a bit off base, as ignorance is bliss. Someone said that for a reason…

In Conclusion

Other advisors have said to me: Why make it so hard on yourself? Why bang your head against the wall? Do what’s easy, put’em in funds instead of putting all the hard work into education and change.

In the end, I really believe in the process and think its worth the work, otherwise I wouldn’t be writing this blog. When people get it, they really tend to get it and that makes my blood, sweat and tears worth it.

Just taking it one at a time…

Tags: Advisor Compensation, Featured, Mutual Funds, Psychology Behind Financial Planning