Brooke’s Note: Ron Rhoades is an academic in his approach to world. But one reason that he is also a force outside the university bubble is because he goes outside the bubble and humbly observes. Recently he made his way from upstate New York to Kansas (Is that even possible?) to see what he could see of 300 advisors who are doing things differently. Here is his report.
I attended the Garrett Planning Network’s 13th Annual Retreat, held in Kansas City, Mo., from July 26 to 28, with the intention of observing a group of people that are, by their actions, bringing the RIA industry closer to what sometimes seems a utopian ideal: a world in which advisors act under the same pure fiduciary code, one that serves the interests of the client first, last and always.
Founder Sheryl Garrett and the 300 financial advisors in the network share a zealous mission — to “help make competent, objective financial advice accessible to all people.” All advisors in the Network offer advice on an hourly basis with no minimums, and nearly half of whom charge flat fees or fixed annual retainers, has recently attracted a lot of attention from the media. This all begs the question — if a true fiduciary standard is applied to all providers of investment and financial advice, could Sheryl Garrett have created the future professional model for its delivery? See: Eavesdropping on the Garrett retreat: A white-knuckle drive; why independents aren’t winning assets as fast as they should be; and six steps to building client trust.
At the conference, I met with a former large wirehouse firm financial advisor who, unwilling to continue to push expensive (and often proprietary) products upon clients, started up her own RIA and joined the Garrett Planning Network just last year. I also met several long-term members of the network, which has a very high retention rate, each of whom spoke at length about the collegiality of the Network, the willingness of its members to share practice ideas with each other, and the many resources of the Network, including but not limited to its “Garrett Knowledge Bank,” monthly coaching calls on both practice management and marketing ideas; financial planning case studies; compliance assistance; and the members’ online discussion forum. See: Eavesdropping on the 11th Annual Garrett Planning Network Retreat.
Nearly all of the members also mentioned the referrals they gained from the “Find a Garrett Financial Advisor” website search function. Sheryl Garrett notes that the average GPN member receives two referrals each month from the resource and her internal surveys indicate that half of such referrals actually become clients. A few members told me of how they built their initial base of clients from the “Find a Garrett Financial Advisor” searches, before disengaging from the website search function as referrals from existing clients poured in and they ended up with far more new prospects than they could handle. See: Influential fiduciaries endorse bootstrapping advisory-industry SRO.
Additionally, Emerge Financial Wellness, which serves 45,000 retirement plan participants, recently partnered with Garrett Planning Network to provide its plan participant’s access to GPN members for financial planning and advisory services from the network. Emerge’s clients receive a 25% discount on GPN members services for the first year. Garrett indicated that other organizations have approached her to partner with the Garrett Planning Network, as they seek out financial advisors “just like GPN members.”
AUM conflicts and remedies
GPN members shared that, by providing services for hourly fees (and many for flat fees), they feel very well compensated. For most advisors, this is not achieved by putting in long work weeks: A recent GPN survey reported that its members’ average workweek was only 36 hours. Rather, the professional-level compensation flows from a steady stream of clients and highly efficient practices. See: 5 ways for stressed-out advisors to build a more efficient practice.
When we compare the professions of today, such as law and accountancy, we see similar comparisons. Many lawyers and certified public accountants work as sole proprietors or in smaller firms, similar to most GPN members. Lawyers (all of the time) and CPAs (in many engagements) are fiduciaries to their clients, as are GPN members. And most lawyers and CPAs charge hourly fees, or project (flat) fees, or some combination thereof — again, similar to GPN members.
While GPN members are not prohibited from charging asset-based fees, only about 20% do. This is likely a reflection of the fact that many feel uncomfortable with the assets-under-management business model. Several of the members I spoke to spoke of the importance of remaining objective, and how AUM fees could create conflicts of interest as to issues involving whether to pay down current debt or to annuitize a portion of a client’s wealth. Other members questioned why a higher AUM client should necessarily pay a much higher fee than a lower-AUM client, when the clients were often receiving the same level of services.
This writer does not suggest that hourly-based fees are perfect, and neither do the GPN members. Hourly based fees can sometimes lead to unwarranted suspicions from a client that the professional is stretching out an engagement in order to generate a greater fee. However, GPN members note how they avoid most of such suspicions, which could otherwise undermine the financial planner-client relationship, by providing an estimate of the time required to undertake the planning requested.
Flaws in flat and hourly fees
The well-known “Picasso story” illustrates a different concern without hourly-based fees. Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him. “It’s you — Picasso, the great artist,” said the woman. “Oh, you must sketch my portrait! I insist.” So Picasso agreed to sketch her. Five minute later he handed her the sketch of her portrait, stating, “Madame, that will be 10,000 franks.” The woman replied, “This portrait is lovely, but it only took you five minutes to draw it.” To which Picasso responded, “Madame, it took me my entire life.”
In essence, hourly fees tend to reward inefficient planning. Experienced planners might require just a few minutes to spot and analyze an issue which less experienced financial planners might spend several hours researching. Raising one’s hourly fee rate helps to correct this situation, but can also result in higher fees for clients who require sometimes time-consuming yet basic financial planning such as the steps required to establish a monthly budget.
However, as noted above, for some financial plans GPN members have moved to a flat fee. Often the amount of the flat fee is quoted after the advisor determines the likely complexity of the issues involved in the financial plan and the likely time required to prepare and present the plan.
Also, one could argue that a combination flat fee and hourly fees is more appropriate. A flat fee could be charged for investment due diligence benefitting all the clients of a firm, an advisor’s ongoing review of ever-changing tax laws, and to ensure the advisor’s understanding of macro-economic and market conditions. The hourly fees could then be imposed for time spent on a particular client. This combination could result in an even better arrangement for both financial advisor and client. See: Why only 14% of RIAs volunteer complete pricing information to clients and why selective fee disclosure is not a winning strategy.
Model of the future?
Over the past two months this writer has been inundated with inquiries regarding Wall Street’s claims that small clients cannot be served under a fiduciary business model. To each inquirer I point out that the Garrett Planning Network’s members, and many other fee-only advisors across the country, are already serving this market. In fact, these fee-only advisors provide, on average, far more and better financial advice, and for fees that are often dramatically lower than the fees paid by customers of non-fiduciary advisors. See: Why keeping FINRA from ruling RIAs is critical to these firms, the investor — and even the U.S. economy.
Indeed, the business model used by members of Garrett Planning Network, with its professional-level compensation arrangements, may prove to be the future of financial advice should a bona fide fiduciary standard be imposed upon all providers of personalized investment advice. Instead of commissions and asset-based compensation arrangements, reasonable hourly and fixed fees would likely dominate the arena of financial services, and financial advice would be available to everyone.
Of course, non-conflicted advice would result in the selection of low-total-fees-and-costs investment products. 12b-1 fees, soft dollars, payment for shelf space, and commissions would all fall by the wayside. Of course — that’s what Wall Street really fears. See: The story of FINRA’s implacable drift from its founding ideals to a pallid 'no-lying baseline’.
In essence, as consumers, with the aid of the media, wise up to the excessive extraction of fees and costs by Wall Street, more and more consumers will be attracted to the Garrett Planning Network, its members, and their reasonable hourly or fixed fee model. And, as advisors search for the right business model to provide expert-level compensation with minimal conflicts of interest, more and more advisors will be attracted to the Garrett Planning Network as well. For GPN members, and consumers who have located them, the future appears bright.