Have you ever wondered why it’s so freaking hard to get low cost quality financial advice? I wondered that too, but then I had a stunning reality check. During the months of August and September, I was seriously considering becoming a financial advisor myself. I started looking into the process, and I discovered traditional “wealth managers” charge so much money for their services. Regulations, insurance requirements, and business expenses virtually eliminate all possibility of low cost advice.
The Paradox: Giving Basic Financial Advice is Not Intellectually Challenging
Perhaps I’m extremely biased because I’ve worked in and around personal finance my entire life, but it’s extremely easy to become a financial advisor intellectually. My girlfriend is a surgeon, and the knowledge base she needs to do her job makes providing financial advice look like mowing the grass.
Financial advisors provide a service. The very best ones provide professional level advice. Unfortunately, most advisors are little more than used car salesmen who don’t understand vehicle quality standing on the corner trying to put you in an overpriced truck. They pitch high fee active funds with commissions. Even worse, some of them put you in variable annuities with 3% or higher annual expenses. These annuities pay them 10% commissions, which is all they really need to understand.
To be a decent advisor, you need to figure out your client’s risk tolerance and objectives. You make sure they have savings set up, and that they have adequate insurance coverage. A good advisor makes sure that you have will or trust in place and that you save a little for retirement. If they accomplish that, then they’re better than half of the useless salespeople out there masquerading as professionals. This minimum level of service is not hard to figure out. Any person with a college degree should be able to provide financial advising services easily with a couple training modules in a week’s time.
Financial Advisor Regulations Are Terrifying If You Want to Provide A Few Financial Plans on the Side
Here’s where we see the first barrier to providing low fee financial advice. When I looked into providing fee based financial advice to people, I was struck with the hefty regulatory requirements.
People like Bernie Madoff and other Ponzi schemers have made state securities regulators paranoid. In each state you want to do business with, the state government typically requires a $200 registration fee. Usually there is an ongoing annual maintenance fee of $100 in each state where you have clients.
While most states have an exception if you only have a couple clients in a given state, these regulatory costs are serious. Imagine if you run an internet based business like Millennial Moola and would love to be able to offer financial advice around the country. After all, my friends from college who need financial help are literally all over the place.
Unfortunately, setting up a business in Missouri here would require a $200 upfront investment before I have a single client. Then, when you ask me for financial help on a Facebook message, I have to see what state you live in and register there to tell you anything if I want to be paid for it. I could easily blow through $1,000 setting up a financial advisory practice just on the regulatory filing fees. I haven’t even written about the difficulty of working with the SEC and FINRA, the national regulators.
Hence, if you want to do some financial planning because you think it’s fun to interact with and help people, good luck. You’ll essentially be giving money away unless you 1) charge a very high price for your services or 2) commit to doing it basically on a full time basis. Because I’m not ready to spend 40-50 hours a week doing financial planning as a “retiree” from corporate life, I couldn’t justify becoming an advisor almost on this high regulatory cost alone.
If the Regulatory Costs Don’t Slow You Down, the Expensive Errors and Omissions Insurance Will
Did you know that as a financial advisor, your entire life savings is on the line? Say I told somebody to invest in an aggressive stock fund because they were young. Assume I didn’t properly document the conversation to cover my ass. If the market tanked, the client might be able to sue me in court for damages. Even if I did nothing wrong, I’d have to spend lots of money defending the lawsuit.
The way around this risk is purchasing errors and omissions insurance (E&O) from an insurance company. They provide you lawyers if you’re ever sued as a result of making a mistake in your business that costs others money. Of course, this insurance costs a minimum of $2,000 for a decent policy.
Can you imagine spending a couple thousand dollars just for an insurance policy that you probably won’t even need? Of course, doctors’ malpractice policies are a multiple of this low cost. I have a ton of sympathy for any professional trying to provide honest services to customers in this business environment. Even something that should be cheap can become ridiculously expensive just because we as a society have decided to make everyone liable for everything.
Business Expenses Were the Straw that Broke this Camel’s Back
Hopefully we Millennials change the brick and mortar dynamic of providing financial advice in high rent fancy offices. Even so, clients are probably not ok with trusting someone with their money who works out of their home. Sure, I’m renting coworking space in the startup oriented CIC Center in St. Louis, but that’s for Student Loan Planner, my flat fee consulting business.
On top of office rent, a financial planner needs credentials if he or she wants clients to trust them. I passed all three exams for the incredibly rigorous Chartered Financial Analyst program. When it came time to apply to use the actual credential, I discover they charge you an annual $275 fee for the privilege. Right now, that’s not worth it for me. My student loan startup clients don’t care what my credential is as long as I provide good recommendations that save them a butt-load of money. Other credentials such as the Certified Financial Planner cost even more to maintain I believe.
Additionally, financial planning clients have been convinced that they need fancy reporting software and beautiful financial plans to trust their contents. Most financial advisors rely on third party vendors for all their software, which can cost as much as $10,000 per year or more. They rely on client relationship management tools to know when to call, what they said on the last conversation, and more.
I cannot bring myself to spend any money on financial planning software because I could probably build something customized for myself in excel. Unfortunately, I don’t think the regulators would like that very much.
Costs Explain Why It’s So Hard to Get Low Cost Quality Financial Advice
Add up all these costs, and I had to think about spending several thousand dollars just to start my own low cost, part-time financial advisory practice. Given that there’s risk I wouldn’t get enough clients, I couldn’t bring myself to go through with it.
You know who isn’t bothered by the costs? Big bank financial advisors at Wells Fargo and Merrill Lynch who charge massive fees and eat away at 2% of your portfolio every year due to advisory and investment management fees. Perhaps the consumer is safer from fraudsters. Unfortunately, they are also prevented from obtaining low cost financial advice from someone like me who would love to enter the marketplace if the barriers to entry were lower.
These high costs act as a preventative measure to anyone who would try to offer competition to the outrageously expensive financial plans that cost $1,500-$3,500 for a few hour long conversations and inputs into a software template.
Although they don’t offering financial planning, if you’re looking just for someone to manage your investments for you, I highly recommend Wealthfront or Betterment as an alternative. They charge 0.15% to 0.35% depending on your asset level, and their investment management fees average about 0.1% to 0.15%. Your total investment expenses will be less than 0.5%. This is a fraction of the cost charged by fancy bank advisors. The services the roboadvisors offer are more sophisticated too, including tax loss harvesting and daily rebalancing. Wealthfront is even working on a product that could destroy the Vanguard Group’s dominance.
I’d suggest using either one of these firms and pairing them with free financial planning help online. If you need advice, the Bogleheads forum offers it for free. It’s basically crowdsourcing as you post your question and a bunch of frugal self made millionaire types respond. Other great sources of free information include Reddit Personal Finance and the Mr. Money Mustache forum. The White Coat Investor also has a good forum for high income professionals.
So there you have it. Ridiculously high costs from burdensome regulations, insurance needs, and business expenses are why it’s so hard to get low cost quality financial advice in this country. Perhaps if these requirements ever change, or if enough readers wanted me to start a practice, I’d change my mind. For now, I’m more than happy to build my new start up providing strategic consulting at Student Loan Planner.