Discounted advisors are like cheap clothes, they look good in the store and then they fall apart after one wash aka a market crash.
Years ago, I sat across from a then retired financial advisor who was questioning the fact that I never discount the price of what I do for clients. I asked him why he did discount the advisory fee. He said that it was more competitive.
But shouldn’t the competitiveness come from the value you offer clients? More on this later.
The fee you pay is called a Management Expense Ratio (MER). If it’s a 2% fee, 1% is going to the fund company and the other 1% is being shared by the firm and your advisor, typically.
Advisors sometimes offer a discount on their portion of the fee in order to make working with them more attractive. As the retired advisor said, “to make sure they stay with you.”
I don’t want a client to just “stay with me.” I want them to thrive.
Here’s why you want to pay the full amount to your advisor:
1. You Don’t Want the Cheapest Financial Advisor on The Block
Getting the discount feels good up front, and you can boast to all of your friends that you got something for cheaper.
But, ask yourself, why is this person devaluing their work? Are they not going to do the job as efficiently?
Maybe they don’t have as much confidence in what they do, so they discount in order to make their work more attractive.
2. The Baseline of Value
This is what I referred to above. Okay, so if you pay 1% to your advisor, for example. Do you want them discounting to .5% and doing 1/2 a percent less work for you?
Give them the 1% and let them do their proper job for you. Otherwise, you may get shuffled into the “who cares” pile of clients. Sad but true. I’ve seen it live.
3. It Shows Your Advisors Confidence
Your advisor not discounting shows that they are confident in what they do and can achieve for you. I’m certainly not referring to cockiness here – the financial industry is chock full of that, thank you Gordon Gekko and The Wolf of Wall Street. I’m talking about humble confidence.
When your advisor meets with you, they should be noticeably clear on what you should be doing in order to achieve your goals. They should have practiced their craft after business hours for years. It’s called mental laziness or mental activity. You want someone who is constantly active and figuring out the best way for you to win.
Make Sure Your Financial Advisor Passes the Test
The way fees usually work is that your advisor will be paid the same percentage whether your account is up or down. So, if your account goes down, they get paid less, and if it goes up, they get paid more. This is a great incentive to keep your advisor accountable for your money.
The next time you meet with your advisor, try to gauge their confidence levels. Are they fumbling around? Not sure how to answer certain questions?
I know advisors who make the client pick their own funds. How are you supposed to know what to pick? Isn’t that what you hired us for?
As long as they pass the tests, pay the fee. By paying more, you’ll actually end up much wealthier in most cases. Remember, cheap clothes look good on the rack and look ragged after one wear.