Broker Check

Practical Planning Tip: Financial Advisor Fees vs Attorney and Accountant Fees

March 13, 2024

Today we’re going to discuss financial advisory fees based on a question I received from a friend recently. The question was as follows:

Q: I’m looking for a financial advisor, but everyone I had spoken to charges a percentage of assets under management. This is an absurd business model. Why don’t more advisors charge a normal hourly fee like a lawyer or CPA, which is optimal?

 

So, I found this question moderately amusing since my friend seems to believe that the fee structure for a CPA or attorney was optimal.

 

I asked him: Have you ever worked with a lawyer or CPA? Is their fee structure really more reasonable? Every fee structure has incentives. They are incentivized for taking their time, some would even argue dragging their feet, and being less efficient. I am NOT saying this is the way every CPA or attorney conducts their business, but this is the type of approach it incentivizes. ….to work slowly, possibly inefficiently, and without any sense of urgency. If an error is made in their work, and this is not uncommon, they will need to REVISE their work and they get to bill even MORE hours.  

 

And Speaking of hours: Both lawyers and CPAs need to bill a certain amount of hours every year at most firms, so they will take the time to get IN those hours even if it means costing the client more money than it should to work on their engagement. Also, how do you confirm they are working all the hours they claim? And How do these professionals prove they are actually working and not schmoozing about politics with their colleagues, or checking their fantasy team, or using the facilities?

 

…And what about all those rookie lawyers or CPAs who charge a boatload of money, but don't know anything and need to spend time asking their boss. You're paying for them to take the TIME to learn on the job! IT’S MAMISH INSANE! Listen, I understand that attorneys and CPAs need to be paid for their service….and perhaps an hourly rate is the best of all options…maybe not. REGARDLESS, is this really the fee structure that you are using as an example of being optimal? Seriously?

 

All that being said, there are also financial advisors who charge project based fees, which makes more sense than hourly rates, in my humble opinion. I still believe that the Assets Under Management, or AUM model, makes the most sense for the most people. As you make more money the advisor makes more money so you are sitting on the same side of the table. You ALSO don't need to worry about paying to ask a simple question, or even a more involved one, it's all included in the fee. It’s a simple streamlined approach.

 

Furthermore, an AUM advisor actually implements the strategy for you so you don't procrastinate which is a MAJOR challenge for most “do it yourself” investors.

 

Listen, I understand that an AUM model may not work for everyone. Everybody is different. Thankfully, there are other fee models to choose from, even if they are suboptimal. You just need to find a competent advisor in whatever fee model you are choosing.

 

Frankly, I believe the biggest advantage financial advisors have over other professionals like attorneys or CPAs, is there are constant debates on different fee structures, hybrid fee arrangements, and it’s easy to find whatever you are looking for. Few other professions have such healthy dialogue of differing fee models, as well as so many practitioners in varied fee arrangements. That’s the key!

 

And by the way, I’d like to note that The lawyers & CPAs I know are all worth their fee and are exceedingly honest. It is just the OTHER lawyers & accountants that I’ve been critiquing!


You can WATCH the full video here.