What Are Our Clients Paying For ?

A lot of financial advisors were in crisis mode ten years ago because of something called Client Relationship Model 2 (CRM2). CRM2 was all about transparency. It required investment firms to provide clients with more detailed investment performance, and it mandated that investment and advisory fees were disclosed in dollar terms.

CRM2 was good for investors. More transparency about fees and clearer performance reporting should be welcomed. But a lot of advisors were worried.

And the robo-advisory firms and DIY brokerages smelled blood in the water. Full credit to their marketing departments. The robos and DIYs put out ad after ad after ad focusing on just one thing: fees.

I remember watching those ads, often while I was with friends or family, and feeling both embarrassed and irate. Embarrassed because that was how we were being perceived, and irate because they made it look like our only job was collecting fees for buying investments our clients could have bought themselves.

Those ads were infuriating, but they forced our profession to confront three fundamental questions: what do clients value, what are clients paying for, and how should advisors be rated?

The Defensive Scramble

The industry's response to those ads was predictable and a bit pathetic. The likes of Vanguard, Morningstar, and other big asset management firms rushed to quantify what they called "advisor alpha" or "advisor gamma."

It was their attempt at assigning dollar values to everything advisors do. Rebalancing a portfolio is worth X. Tax-loss harvesting is worth Y. Behavioral coaching is worth Z. Added up, and suddenly advisors were worth "about 3% annually," or whatever number justified the fees.

And when that felt insufficient, the message shifted. I remember hearing this sentence so many times in 2015 and 2016: "Well, we also do financial planning! And estate planning."

It was a mess. Instead of focusing on what clients value, we got defensive and tried to justify our existence by listing everything we do, often without even being able to articulate it (estate planning is not just naming beneficiaries appropriately, by the way). We let the robos and DIY platforms define the conversation, then scrambled to prove we belonged in it.

We missed something important. We don’t decide our value. Our clients do.

The Incentive Problem

Unfortunately, from an advisor's perspective, the answer to what are clients paying for? is based entirely on how the advisor gets paid.

An advisor who charges flat fees for financial plans believes planning is where the real value lies. To them, investment management is a commodity. It's important but hardly worth premium fees.

An advisor who gets paid based on assets under management will also build financial plan (or something that looks like it), but they won't value it the same way. To them, the plan is table stakes. The real work is portfolio management, ongoing adjustments, and keeping clients invested through market chaos. That's what justifies the fee.

And a commission-based advisor? They'll tell you neither planning nor portfolio management matters as much as getting clients into the right products at the right time, then getting clients out at the right time too.

The best part? Advisors in each of those camps don't respect each other. Even they can't agree on what clients are paying for.

I could go through all the other caricatures like the stock pickers, the tax optimizers, the insurance specialists, but it's all the same. Each compensation model drives how advisors view their value.

It's not dishonest. Biases exist. Rationalizing that what we get paid for is what matters is human.

But clients get to decide what they value. Good service and good advice are non-negotiable. But the true value, what clients are paying for, isn't up to us to decide. It's up to them.

The Standards We Can't Have

So how should advisors be rated? There can't be universal standards for this profession. And we need to stop pretending there should be.

We can't agree on what we do that's valuable. We can't separate our compensation structures from how we perceive our own worth. And most importantly, different clients value different things.

But there are realities we can't escape.

We'll be judged on investment performance. Fair or not, complete or not, clients will look at their account balances and compare them to benchmarks or what could have been.

We'll be judged on whether we helped clients get to where they wanted to go and whether we made that journey as simple as possible.

We'll be judged based on the answers to questions like Did the plan work? Did they retire when they wanted to? Did their kids get through school? Did they avoid unnecessary complexity, taxation, and stress along the way?

Those aren't things you can standardize or measure with advisor alpha calculations. But they're the things that determine whether a client keeps working with you or fires you.*

I'll tell you what I think we actually do that's worth paying for next time. 

*Exemplary customer service matters more than most advisors want to admit. It's often what keeps clients around when the portfolio underperforms.