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What’s the best way to pay your financial advisor? How does fee structure affect performance? In this episode of Dentist Money™, Reese & Ryan explore the pros and cons of five compensation models and the outcomes you can expect from each one. They also describe the fee structure used by DentistAdvisors.com to align clients’ best interest with advisor incentives.WATCH VIDEO ON YOUTUBE
Speaker: Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors a registered investment advisor. This is Dentist Money. Now, here’s your host Reese Harper.
Reese Harper: Welcome to the Dentist Money Show, where we help dentists make smart financial decisions. I’m your host Reese Harper here with my trusty co-host, Sir Ryan Isaac.
Ryan Isaac: The intro again.
Reese Harper: Sir, it’s good to have you back in the studio.
Ryan Isaac: Thank you.
Reese Harper: And today I want to jump into a question that everyone has.
Ryan Isaac: Yes.
Reese Harper: Which is, how should I pay a financial advisor?
Ryan Isaac: Yep.
Reese Harper: A lot of people have this question.
Ryan Isaac: There’s a lot of ways you could pay a financial advisor. There’s a lot of ways you could pay for financial advice or financial products.
Reese Harper: Yeah. I think that it’s worth going through how different people choose to do this and the different effects it has. It has other implications too, about how you pay different types of people, different service providers in your life that you think are, it’s an interesting… it’s an important view on how people are going to service you as a client depending on how you pay them. This podcast happened because I lost my temper and-
Ryan Isaac: So they all start.
Reese Harper: …By losing my temper, my version of losing my temper is, I crinkle my brow and get really angry and hold it inside. I just want to talk.
Ryan Isaac: You just want to talk. [crosstalk 00:01:43]. You just walk in and you vet.
Reese Harper: That’s my temper. I don’t normally strike Ryan directly with the no physical contact.
Ryan Isaac: [crosstalk 00:01:51]
Reese Harper: Not with closed fist.
Ryan Isaac: Not with a closed fist. It is an open backhand occasionally.
Reese Harper: With my left hand because it’s not my dominant hand. I feel like I’m able to just call his attention without really coming across as physically abusive and I don’t violate any OSHA compliance rules by doing it that way.
Ryan Isaac: No. I feel like it’s fine.
Reese Harper: Fair enough. But this wasn’t quite that bad. I just lost my temperament slightly and I came out of my office and I opened the door and I said to myself, “The first person I see, I’m going to tell them to write a podcast about this phone call that I just got off of, and I want them to just listen to the call recording and I want a podcast out of it.”
Ryan Isaac: Make a podcast. So, you come out of your office, you’re steaming after this phone call, you went on a tear for probably 50 minutes straight and someone made eye contact with you and you’re like, “You.”
Reese Harper: That. I pointed directly at Nate because he is the analyst staring at me wondering what I was thinking and I said-
Ryan Isaac: The door opened abruptly.
Reese Harper: …”You write the outline for the next podcast.” This is what the podcast is about. What you pay for a good or service is going to lead to a specific outcome. I think one of the assumptions people make is the lower the fee that they pay, the more money they’re going to have at the end.
Ryan Isaac: Therefore no brainer pays little as possible.
Reese Harper: No brainer, like why would someone pay more for financial planning or investment management or some kind of financial planning service?
Ryan Isaac: Now, a lot of people listening would be like, “Well, because you get what you pay for, there’re a lot of things in life,” but that there is a prevalent mindset that if it’s just as low as possible, you keep more and that’s better overall.
Reese Harper: You’ll see that with home building, you’ll see that with buying or selling a dental practice with a broker, you’ll see that with real estate agents and there’s all kinds of ways you can pay for a service. There is not a bad way or a good way. There are just different results that you’re going to get from how you pay for things. I think it’s important to know that you’re specifically choosing… the way that someone’s getting paid, is the way you want them to get paid for the result you want to get.
Ryan Isaac: Okay. So, today then, the point is we came up with five. Five ways you can pay an advisor in this industry to do work to [inaudible 00:04:25].
Reese Harper: The main question that we’re trying to help people understand is how should I pay a financial advisor?
Ryan Isaac: The first one is you can pay somebody commissions.
Reese Harper: Okay, so you could pay someone a commission meaning, I buy a financial product from you and-
Ryan Isaac: You get a commission for that.
Reese Harper: …You get a commission for that.
Ryan Isaac: Okay.
Reese Harper: The broker gets paid from the product vendor. Whoever made the product pays him a commission to sell it to you. If you really, really want an insurance product from a particular insurance company and you’re like, “I just want… I don’t want to make changes to this, I don’t need a lot of flexibility because I know exactly what I want and I really like this insurance company and that’s the only insurance company that I want to do business with.” Then maybe paying a commission isn’t the worst way to get advice around life insurance. If you already know, like if you don’t care which company is the cheapest, or if you don’t care about trying to find the product that, like let’s say you’re a dentist and you know you probably need $500,000 of insurance now and next year you need like $450,000 and the year after you need $350,000, you know your needs are going to go down, but rather than even worrying about that, you just say, “I just want to buy $1 million of insurance for 20 years. I don’t care-”
Ryan Isaac: How good.
Reese Harper: “…And I really want it with this particular company.” That might be a reason why you can pay a commission. I Don’t know who-
Ryan Isaac: We’re stretching.
Reese Harper: …We’re stretching now.
Ryan Isaac: We’re trying. We’re trying to give some pros for paying someone a commission for selling a financial product.
Reese Harper: The cons of this are obvious.
Ryan Isaac: Everyone’s a con.
Reese Harper: The cons of the commission based model are pretty apparent. It’s not transparent, meaning you don’t really know what you’re paying someone. If you look at your mutual fund right now, if you look at all the mutual funds you own, chances are most of you listening have mutual funds that are what are called commission based mutual funds. Or others, there are charges that get paid, that pay an upfront commission to the broker that sold it to you every time you put money into that fund.
Ryan Isaac: Upfront ones are usually just under 6%.
Reese Harper: Yeah, well, there’s a variety of upfront commissions that you get paid, but the most expensive one is just under 6%.
Ryan Isaac: It can go lower and then it’d be kind of the commission to be scattered throughout the life of the product.
Reese Harper: Unfortunately, on top of the mutual fund, there is also some added costs that you don’t, that don’t get paid to the broker, but they get paid to the broker’s broker, the parent company of the broker, for distributing that mutual fund to you. It’s really messy. You’ll never understand it.
Ryan Isaac: And most of the time they’re not showing up on statements.
Reese Harper: You won’t see those on your statements. They’re not transparent, they’re not disclosed. It’s not a good way, in our opinion, to invest money. There’s a lot of conflicts of interest in that model, right?
Ryan Isaac: Yeah, the incentive… if you earn money every time something changes, or every time, like for example, if someone’s saving money consistently and you’re getting paid on a commission, you’ll get paid commission every time they saved money. But if someone’s not a saver and you hold a portfolio for someone who’s not putting money into it, you’re not earning money, you’re not earning as much money anymore.
Reese Harper: As a broker.
Ryan Isaac: As a broker.
Reese Harper: So, as a broker, when you invest money with me regularly in a commission based model, I get little chunks of commission-
Ryan Isaac: That’s correct.
Reese Harper: …Every time you make a deposit. But if you don’t save money and you’re just letting it sit there, I don’t make any money.
Ryan Isaac: Yep.
Reese Harper: So, what’s my incentive?
Ryan Isaac: You’ve got to change it.
Reese Harper: I want to-
Ryan Isaac: So, I mean…yeah.
Reese Harper: …Not to say everyone does this, but there is a incentive there for them to look across their book and say, “Man, I got to go recommend something to this client because they already paid me a commission a few years ago. I’m not getting the commission anymore-”
Ryan Isaac: And its really common.
Reese Harper: “…And I’m going to move them into something new.” That is extremely common and very frustrating for us to see because in many cases people move into products that were worse than the one they were in in the first place.
Ryan Isaac: Mm-hmm (affirmative)-
Reese Harper: If they just would’ve, not that the first one they were in was good necessarily, but they moved from a worse product to an even worst product, and so that’s just not a…[00:08:29]
Ryan Isaac: Not much debate on whether, I mean, I don’t really ever talk to anybody. It’s like, “Man, I don’t know, maybe I should pay a commission based broker.” No one really feels that way anymore-
Reese Harper: No.
Ryan Isaac: …But it’s important to bring up as one of the ways that’s still very common and typical that you can pay someone for your investments or funds of course.
Reese Harper: Very, very few circumstances would this ever be something that would be advisable. You don’t want to be in a situation where the person making a recommendation to you has some incentive based on what they’re going to make from the product. Your financial planner should not be making money from the mutual fund company. You should pay him directly and the fee should be transparent and the costs of the products that you purchase should be a wholesale.
Ryan Isaac: Independent. Yeah, and independent from the advisor.
Reese Harper: They should be at wholesale and be independent from the advisor. That’s just a good way to go about doing things. Now let’s talk about the second way that people get paid. Hourly rate. This is [in terms 00:09:25].
Ryan Isaac: Most common in professional industries.
Reese Harper: Very common. Now, there’s a lot of process, a lot of cons, but it’s common for attorneys and CPAs and financial advisors and consultants and in many scenarios, it’s actually, it’s endured the test of time for sure. Right. This model of compensation has been around for a long time and it keeps working. I think that’s a good, it’s a good standard of knowing how expensive someone really views themselves and how much work they’ve-
Ryan Isaac: Well, it’s easy to just go, “Yeah. I don’t want to pay that.”
Reese Harper: …You can compare that.
Ryan Isaac: Yeah. You can compare.
Reese Harper: What are some of the pros of that model?
Ryan Isaac: Well, one of the things is the client… a client will only pay when they actually need advice. If you say to someone, “I’ll work for X per hour, you’ll call. You’ll let me know and we got to work on something.” The client can really dictate how much they’re going to be billed for things.
Reese Harper: Yeah, exactly. What is another pro of that model?
Ryan Isaac: Well, it’s transparent. You know exactly what the costs are. You know exactly what you’re paying for, how much time, someone’s… a hundred bucks an hour and they spend an hour and you know you spend $100. You don’t know that with a lot of other ways, especially the one we just talked about on commissions. You just don’t know.
Reese Harper: Yep. It’s very specific. It can be project based, it can be as needed.
Ryan Isaac: It can tailor to specific situations. One of the things that I like about billing somebody hourly besides the things we’ve mentioned so far are that, every once in a while we’ll come across a case where we’re not a good fit as an investment advisor. We’re not a good fit to take this person’s money and invest it at the point where they’re at in life. It could be a cash flow issue, it could be they’re saving for a big project. They got to spend all their money soon, something like that. We also might not be a good fit to put them into our longterm really comprehensive financial planning process. Might not just be a good time and you’re good fit for them. But we do come across people every once in awhile that have questions that I know nobody else is going to answer for them. It drives me a little crazy too because I know that if they were anywhere else or a lot of other places in our industry, they’ll either get sold a product as their solution-
Reese Harper: They’re going to be thrown into that commission based model.
Ryan Isaac: …Or they’ll get thrown into the commission based model and they’re not going to get help. They just need someone to spend five hours just answering questions about something they can’t figure out anywhere else. For me, I like to be able to say, “All right, this is what it cost per hour. I think it’s going to take three, four, five hours stand. Between conversations, I got to do a little bit of research and it’s going to take me 30 minutes just to type the email out to you that you want written instructions.” But it makes me feel good that I can provide a solution. If someone has a really acute, specific need that we can address in a few hours, really transparent and help them in a way that they were just like, “I’ve felt lost in the past.” That’s what I like about the hourly model.
Reese Harper: I think it can work really well for problems that are uncommon. Like uncommon issues, like research project. I would look at it the same way or in a similar way, maybe offer my vantage point on the pro of an hourly rate, is that if someone comes to me with a situation that I feel like is quite unusual, it’s a really an… they’ve got a-
Ryan Isaac: [Unpreventional 00:12:44] or something.
Reese Harper: …Yeah, they’ve got a financial product or an investment that they’ve made that’s not really, it’s very specific to their situation. They put a specific amount of money in a specific product and they’re really not sure how it’s performing. They’ve got an insurance policy or an annuity or an investment with a family member, or they put some money into a piece of real estate or a private business and-
Ryan Isaac: Or trying to make a big decision with the practice.
Reese Harper: …Or they’re trying to make a big decision to the practice, or they’re trying to decide if they should put… they just have a big choice to make. Either something they’ve done or something they’re trying to do and they just need someone to really talk through around this decision. I think that can be a good way to use an hourly model because it’s not a longterm engagement. It’s an acute short term need and I think that’s the place that hourly models work really great. What’s some of the cons of that model?
Ryan Isaac: Well, from a provider standpoint of pain in the butt. From doing it, from billing people it’s-
Reese Harper: It probably adds like 10 to 15% of overhead time just in tracking things.
Ryan Isaac: …Yeah. From a provider standpoint, it’s a pain to do it. We’ve done hourly work, but it’s a huge pain. From the customer standpoint, the client’s standpoint, how many times have you heard someone complain like, “I called my attorney, I called my CPA or I called my advisor and they billed me for the 12 minute call.” I’ve got an… “He answered an email and then I got a bill for it.” There comes a point where some people don’t want to engage because like every little interaction is going to be paid for.
Reese Harper: Yeah. Well, and my… we don’t bill on an hourly basis, but if at least we, in rare cases we’ll do it because sometimes I just feel bad for people and I’m willing to help them out. But it’s not a good model, it’s not very sustainable-
Ryan Isaac: No.
Reese Harper: …But one of the things I don’t like about it is that, like what just you said is that, somebody says, “Well, they charged me for like 12 minutes. It’s was just like I barely had any [inaudible 00:14:48] at all.
Ryan Isaac: What will happen over time, they’ll just stop asking questions. They’ll skip things.
Reese Harper: But it’s like in fairness to the person that’s charging hourly, it’s like, well-
Ryan Isaac: Yeah. I was going to say that. It didn’t work.
Reese Harper: They stopped what they’re doing, they picked up your call, they’re on the phone for 10 minutes and then even after that it took another 10 or 15 minutes to get back-
Ryan Isaac: Wrap up and get where they were.
Reese Harper: Where they were, getting back in diverse place. A 10 minute call takes them 30 minutes of their day and-
Ryan Isaac: It’s [inaudible 00:15:13] They don’t want to pay for it.
Reese Harper: …No one wants to pay for that because it’s just like, “I talked to you for 10 minutes and you billed me.” It just doesn’t promote like a-
Ryan Isaac: [crosstalk 00:15:21]
Reese Harper: …relationship that is ongoing.
Ryan Isaac: That totally, it does not promote getting deep into someone’s situation, really understanding a problem. It’s very sad process.
Reese Harper: I said that one of my… the worst cons for me besides that, it feels unfair, I think to a lot of people, but the worst con is that it isn’t proactive at all. It doesn’t allow a service provider to be proactive and fix things because they’re worried that by being proactive, they’re going to rack up a bill-
Ryan Isaac: Here’s the thing.
Reese Harper: …And you’re not going to want to pay for it because you didn’t ask them to do it.
Ryan Isaac: You didn’t ask them to do it. You were expecting two hours of work, the guy comes to you and says, “Hey, I stayed up late last night. I did five extra hours of work and research to help this, learn even more about the situation.” And you’re like, “I don’t want to pay for the five hours.”
Reese Harper: Yeah. Well, it was… because the problem with hourly is usually people have to do research on your specific case for them to deliver good advice. I do research for your specific case, and it might be the only time I’ve ever asked a question about your individual case, but I can’t really, in an hourly model, I have to bill you for that. But for the next person that comes along, I already know the answers. So, who paid-
Ryan Isaac: That’s true.
Reese Harper: …For the research? Well, the first person always ends up paying the most. That’s the inherent nature of hourly work is, you get better and better and better over time, answering questions faster and more efficiently, but if you’re the person that-
Ryan Isaac: That’s bringing the unique situations to the table.
Reese Harper: …Unique situations to the table-
Ryan Isaac: You’re paying for about…
Reese Harper: …You pay a lot for that.
Ryan Isaac: Yeah. Hey, it’s like investing in research though.
Reese Harper: Yeah. You’re fathering the cause of this other person’s business.
Ryan Isaac: [Humanly 00:17:03]. Yeah.
Reese Harper: Right?
Ryan Isaac: Yeah.
Reese Harper: Anyway. The third type of compensation model is the old fixed fee. Different than hourly rate. Very different.
Ryan Isaac: It’s very different. Some respect to the fixed fee people out there.
Reese Harper: On what?
Ryan Isaac: What they’re saying, the advisor’s getting paid on a fixed fee or just… they’re saying, “Look, I’m not going to take commissions. We’re not going to go the hourly song and dance. I’m not going to bill on assets. It’s just you pay me a flat amount for my work.”
Reese Harper: What’s the pro and what’s the con? [crosstalk 00:17:34] Let’s talk about some pros to that.
Ryan Isaac: Well, again, it’s really transparent. You know exactly what the cost is upfront and you know what you’re getting. You know what you’re paying for you, you know what you’re getting. So it’s transparent. It can be predictable in your budget, so if you say every year financial advice is going to cost me 5,000 or 6,000 bucks, like fixed and then, it’s baked into the budget and you can plan on it. It’s transparent and predictable.
Reese Harper: It feels sometimes like a better deal, I think for someone who has more money because since everyone pays the same amount, if you bring more money to the table, you’re investing more with a person that charges on a fixed fee. You’re paying effectively a lower percentage.
Ryan Isaac: Versus, you’re comparing it to instead of getting billed a percentage of the assets that you have.
Reese Harper: Yeah.
Ryan Isaac: If you’ve got 1 million bucks and someone has $100,000, you’re paying the same amount as someone who has a lot less than you, so it feels like you’re getting a better deal.
Reese Harper: Yeah, totally.
Ryan Isaac: It feels that way.
Reese Harper: Yeah.
Ryan Isaac: Okay.
Reese Harper: Another pro of the fixed fee that I personally like, is it matches up really well with repetitive work. Any repetitive task that doesn’t get more complicated, a fixed fee actually tends to accomplish that goal quite well.
Ryan Isaac: A system or a process or something.
Reese Harper: Yeah. If it’s like-
Ryan Isaac: Something [repeatable 00:19:01].
Reese Harper: Book-keeping for a dental practice can be done on a fixed fee basis really well because there’s not, like transactions don’t vary dramatically between practice to practice. So, you wouldn’t have one practice. It’s like three times as more complicated as another one if they’re both just a single location. If you had two locations, it’s twice as complicated, and three locations, it’s three times as complicated because you have three times as many transactions. Right. But you know, one location is a relatively fixed amount of work, it has a similar amount of employees and it makes sense to charge a fixed fee for that. There are some financial planning tasks that are really good on a fixed fee basis.
Like if you’re going to sit down with someone once a year and have an annual review where you just sit down and you’re taking a day to go through everything, and that’s the way you want to do your financial planning, great. Because it’s a day of a time. It’s a fixed allocation. You don’t have to be thinking during that day if I’m going to go late or early or they really use all my hours that they allotted to me. It’s just you’re agreeing to a project that has a defined scope of things. I think a lot of things that weren’t good or on a fixed fee are tasks. They’re just task related stuff. Like in our practice, we have a service model that allows people to pick a fixed fee service option, it’s a monthly fee that they-
Ryan Isaac: For planning.
Reese Harper: …Yeah, for financial planning. We think it works really good because a lot of the financial planning related tasks, like, “Please make sure all of my insurance policies are in force and measure whether I have enough insurance for each of my areas of my life. My liability insurance and my disability insurance.” Whatever. Or if you say, “I want you to evaluate the interest rates on my loans.” Or, “I want you to look at my debts and analyze them.” Well, that’s a relatively fixed amount of time and you can put a fixed price around it.
Ryan Isaac: Yeah. It’s predictable. It’s repeatable.
Reese Harper: Yeah. One of the cons of this model that I find is that over time, your advisor doesn’t have as much of an incentive to be creative and implement and a better solution for you. They actually have an incentive to reduce the cost of what they deliver to you, because-
Ryan Isaac: And the complexity [crosstalk 00:21:40].
Reese Harper: …And the complexity. Because let’s say they get busier and busier, fixed fees pretty easy to do for a while because you don’t have a lot… you have all this time. Let’s say you’re a financial adviser and you’ve got like one administrative assistant. Well, for awhile, fixed fee works good until you start getting busier. Then when you start getting busier and you get to the point to where you can’t really take any more clients, then you start saying, “Well, someone else has to… something’s got to give here. I’ve either got to raise my fixed fee or I’ve got to stop doing as much work for each person so that I can make more-
Ryan Isaac: [crosstalk 00:22:21] more clients.”
Reese Harper: …I got to have more clients.”
Ryan Isaac: You got to do more volume. Well, I think the thing about this from a provider standpoint, if you as a financial adviser you have time to work with let’s say a hundred clients. Okay? And everyone pays the exact same amount of money. It’s a flat fee. It’s the exact same for everybody. Where’s your incentive? What kind of clients are you going to want to work with? The ones that are going to make you spend a lot of extra time trying to come up with creative solutions, doing a lot of research, digging in really deep? The problems are you going to find all the ones that are really simple and easy and you don’t need a lot of work done.
What’s going to happen over time is if you have two different kinds of clients and you might be a bigger, maybe have a lot of money in investments and you say, “I just want to pay a really low flat fee. The same fee that a lot smaller person is going to pay.” Your advisor is not going to have any incentive over time to spend a lot of extra work and effort trying to learn more and research more and get more creative about fixing your problems or being proactive about the problems. It’s just the same… you’re getting paid the same no matter what. There’s not an incentive to work harder.
Reese Harper: Yeah. Well, and then in some cases people say, “Well I have different fixed fees depending on how complex you are.” Right?
Ryan Isaac: Yeah.
Reese Harper: If you’re really big, you have this fixed fee. If you’re… it’s rare. Most people have a fixed fee and they’ll just be the same. What that means is everyone’s getting the same product, which is inherently, in my opinion, financial planning is not a system that is the same for every person. Like, two 40 year olds that make different amounts of money-
Ryan Isaac: We were just talking about that this morning.
Reese Harper: …With different goals. Who-
Ryan Isaac: Different history.
Reese Harper: …have different specialties, who have started working at different points in their career, who have different practice values and collections history. They don’t have the same needs. They don’t have the same financial plan, they wouldn’t pick the same retirement accounts, and they’re not going to pick the same investment holdings because their cashflow is very different. They’re not going to pay down their debt the same, and so inherently you can’t have one plan that’s the same for those two people. Fixed fee makes it difficult because you’re building a business around a fixed amount of revenue that you’re going to get for every person. It just isn’t, it’s not-
Ryan Isaac: You have a dentist got paid X number of dollars no matter what he did. High end procedures that are really complex or just cleanings and fillings. You wouldn’t give as much of his creativity and his time and his attention and expertise at the high end there. Just wouldn’t spend the time there because he’s not getting compensated for it.
Reese Harper: Yeah. I just think that’s what you typically see. You see someone that works in a fixed fee model, you see someone that you have to work way harder than you should for one particular client, and then another person you under work for and, I don’t know. It’s tricky to…
Ryan Isaac: Number four, we arrive at number four, quattro as they say.
Reese Harper: Yeah.
Ryan Isaac: This is what’s referred to as AUM fees, Assets Under Management. It’s also the most… it’s the way fee based or fee only financial advisors get paid. It’s a percentage of the money that they manage.
Reese Harper: Yeah. It’s a really, really common industry compensation model, probably one of the most common. Commission based is maybe the most common.
Ryan Isaac: It’s still, yeah. [crosstalk 00:25:46]
Reese Harper: Still the most common, but AUM fees are really common. The pros of this model I think are that your financial advisor is motivated because they know that as you get larger account balances by saving money, growing your money, lowering your taxes, they know that they’re going to earn more. As time passes, it puts you on the same page towards working towards larger balances. I think that can be a pro.
Ryan Isaac: Yeah. Puts you kind of, you both have the same motivation. A firm who is billing on a percentage of the money they manage has the same incentive that a client does, which is to get wealthier. They want more money. That’s the same goal a client has. It puts you on the same side of the table for sure.
Reese Harper: Yeah. I think people are more likely to engage. Like, I’ve done a lot of testing on putting all these different kinds of fees, hourly, flat fees, AUM fees, in front of people and just saying, “Which one do you like the best?” I think people are more likely to pick an AUM fee because it’s money that they feel like they wouldn’t have any way. It’s money that comes from growing their investments as opposed to checks they’re writing. It’s funny how people complain about spending $500 to an attorney to have a man analyze something or whatever the fee is-
Ryan Isaac: Because they wrote the check.
Reese Harper: …Yeah. But it’s not as painful. There’s pros, there’s also cons to that. Because it’s not as painful, sometimes people don’t even really know what they’re paying and they don’t ask questions and they don’t know if it’s reasonable, and they just let it… they just don’t think about it. You’ll find people that are probably just paying three times what they should be paying in an AUM model and getting very little value for it, but it’s hidden. That can be a con. I think the pro though is that it’s easier for people to make the choice to work with a financial advisor and I do think that’s a good decision for most dentists. Working with a financial advisor is something that will put most dentists ahead of where they would have been trying to navigate this on their own, but they’re not as likely to engage in the other compensation models because, just like they don’t pay for attorneys very often.
Ryan Isaac: Yeah. They’re hesitant. I think something that’s helpful with an asset fee like that is that it is transparent. It’ll show up on quarterly. Most advisers billing a percentage are billing quarterly, and it’ll show up on a statement. On a clear statement. It’ll be there every time on a statement. It’s easy to know what it is, and I’ve heard these conversations too where people are exploring hiring an advisor for the first time and they’re curious how people get paid.
I’ve been asked a lot, “Does it matter… do you get paid different if I’m more aggressive or more conservative? Do you get paid more If I use a 401(k) or a simple IRA? Do you you get paid more if I have an emergency fund or my kids’ accounts?” That’s one of the nice things too about the… it’s transparent, but it’s also, it doesn’t matter. It’s not effecting the decision of how aggressive your account will be invested or what type of account it’s sitting in. There going to be paid the same way no matter what. There’s not an incentive to do something that’s not in a client’s best interest.
Reese Harper: Yeah. I think the nice thing about it is, closely, it’s tied to the market, so the market prices things everyday. Your investment accounts move every day and it’s very objective in the feed that it can calculate because investment markets price things every day and the precise amount that you have to pay someone is calculated really objectively. Some other models, like the next one we’re going to talk about, it’s a little bit harder when you start-
Ryan Isaac: To value something based. Yeah.
Reese Harper: Yeah. I think the con of that is sometimes your financial advisor, if you’re only paying them on an asset based fee, and you’re a small client, if you’re a small client and you don’t have a lot of money, most of these the best investment advisers just won’t work with you.
Ryan Isaac: That’s where you hear about people ask about minimums. “Do you have a minimum amount of money that needs to be invested or? That’s where that comes from.
Reese Harper: Yeah. That’s why I don’t… AUM fees are not a good way to make planning accessible to the entire marketplace.
Ryan Isaac: There’s someone who has 50 grand and the bank doesn’t pay him much revenue to affirm, to spend hours and hours per year [inaudible 00:30:35].
Reese Harper: Yeah. A lot of times they need a lot of help. There needs to be… in our business we’ve separated out the services so that we can help tailor the type of work that a client needs done with the type of compensation that we need to earn to do that type of work. We think that the con of sometimes this asset based model or AUM model, is that it doesn’t allow people with really small balances to get the same talent or advisor, as they would if they had lots of money. It also sometimes makes the advisor only focused on the investment accounts themselves. If the advisor’s not doing any… sometimes in this model, you’ll see a lot is that advisor will say, “Well, I do comprehensive financial planning when you let me manage your money.” That’s really in an… if you had $3 million to $5 million, yes, that would [crosstalk 00:31:40].
Ryan Isaac: Yeah. Takes place. Yes, it takes place.
Reese Harper: It happens all over.
Ryan Isaac: With really competent people.
Reese Harper: But when you have 100,000 or 200,000 or even probably as much as 750 to a million, comprehensive financial planning is not going to be done at that level to the degree it needs to be if you’re just paying your advisor on an AUM fee. Because comprehensive financial planning for a dentist includes a lot of things. It’s hard to do all the things that need to be done if the only place you’re making money is on an investment account and that balance is small. The bigger you get, the more likely you are to see an advisor doing planning in a really comprehensive way.
Ryan Isaac: Yeah. You get attention.
Reese Harper: Just by you paying them an asset under management fee. But the smaller you are, the less likely it is to happen. That’s where we think an hourly or a fixed fee works well for people that are in the growth phase of their career to get the financial planning done, that they really need the tasks done.
Ryan Isaac: The repetitive tasks, the financial planning, the yearly annual stuff that has to happen every year in planning that’s separate from investments.
Reese Harper: Yeah, it’s not perfect. Right? We work on… we have a client model where an asset under management fee applies, and we think it really provides great incentives for us to spend extra hours in time thinking about how we’re going to improve all of our client’s situation with the type of investments we select and the type of research we do on portfolios, the type of analysis we do on the comprehensive planning on the whole situation, if you’re only getting paid a fixed fee, sometimes there’s not an incentive [crosstalk 00:33:26]
Ryan Isaac: There’s not an upside. There’s not a growth potential. There’s not an upside. In any business in the world, incentives that have some upside in growth potential are the ones people gravitate to. That’s where you’ll go put your extra hours. That’s where you’ll be willing to do something at night or on a weekend or step aside when off business hours and do some work. That’s why… but it’s also pretty inline with what the client wants to do too, which is have more money. People will spend time on the things they’re getting paid to spend time on and they will develop further expertise on the stuff they’re incentivized to get smarter at.
Reese Harper: If someone’s getting paid a commission from a particular product, it’s amazing how much they know about that product. I’ve had, let’s say it’s an annuity, and someone has made a livelihood around selling annuities. Their knowledge of those… of their individual company, the table that presents.
Ryan Isaac: Not even annuities as a whole, [crosstalk 00:34:22]
Reese Harper: Like how much they know about X, Y, Z insurance company. They have… it’s amazing how the broker knows. He knows the management team of the company. He knows-
Ryan Isaac: Backstories of every… yeah.
Reese Harper: Every little feature in widget and sometimes that’s really helpful. That is helpful for the X, Y, Z insurance company to have people like that, that they can go sell their product and find a way to differentiate themselves in the market. But it’s not that helpful for a financial planner to have that much in depth knowledge about one insurance companies, X, Y, Z insurance. Or an incentive to dive really deep into that one company’s balance sheet and understand that X, Y, Z insurance company has this one feature and so how you’re paid will affect how you develop. I think-
Ryan Isaac: Yes. That’s the point.
Reese Harper: …AUM fees do a good job of rewarding financial advisers around their knowledge of investments because-
Ryan Isaac: That’s how they’re getting… that’s the livelihood they have. If you get paid to do really high quality crowns or really high quality implants, where are you going to spend your time on CE? What courses are you, what equipment are you going to be buying? You’ll buy the best equipment to do the job you’re being paid to do. Okay. So, in these first four, we’ve covered the most common ways that people pay for financial advice and financial products. Right? But we’ve talked about, what if you could just scrap the norm and start from scratch and build a better way to build people to have people pay for the advice that they actually receive so it’s fair to everyone.
People giving it a fairly compensate for the expertise, people paying for it or paying for what they actually need and what they get. It’s like if we asked the dentist, “If you could start the whole system over again of how a dentist gets paid, you probably wouldn’t go right for the multiple insurance company reimbursement plans that changes every year between every state and every procedure.” They’d come up with a different, easier solution that’s not as messy and changing all the time. To end the podcast, if you could come up with a way to have advice paid for and receive, what would you do?
Reese Harper: Well-
Ryan Isaac: We talked about this a little.
Reese Harper: …I think first you’d have to… you would definitely not want a financial advisor to be paid based on product recommendations. Based on getting kickbacks from products. You definitely would eliminate that. That would just not exist. If you could just take that whole thing away, I would say, and find a way to keep advisors to where they would be trained on products.
Ryan Isaac: Still smart enough.
Reese Harper: Yeah. To understand the industry but not have the insurance companies paying them or the mutual fund companies paying them, then you can really separate. What that would do, it would do two things. First it would make the advisors have to be really on top of their game, which I felt like we have to do because we don’t get to… we’re not being paid by a product provider and we have to know the answers around most, like 90% of products or we don’t know what’s going on. It keeps the insurance companies and the mutual fund companies and the annuity providers and the real estate companies, all of those businesses it keeps them honest because they have to compete on their wholesale pricing. They don’t get to buy people to, they don’t get to just pay commissions to essentially buy shelf space, and I would get rid of that-
Ryan Isaac: That would be gone.
Reese Harper: …and then I would, I don’t like the hourly model because the hourly model-
Ryan Isaac: It’s not proactive or longterm.
Reese Harper: …It’s not proactive, it’s not longterm. I would… I think the ideal model would be to have some kind of a model that was based on complexity of a person and that complexity would dictate the fee.
Ryan Isaac: You mean like how many locations do you have? Or how many business entities do you have? How many tax returns do you file? How big is your net worth?
Reese Harper: Yeah. How complex is it? Like if you could calculate-
Ryan Isaac: What’s your balance sheet look like?
Reese Harper: ..Complexity in a perfect way, what’s your personality type?
Ryan Isaac: Okay. Are you in the deeper end?
Reese Harper: How many questions do you like to ask versus how many questions do you not? Do you just want to be after [crosstalk 00:38:42]
Ryan Isaac: How do you communicate? Do we resolve on a phone call or do I have to type emails?
Reese Harper: Do you like to come into an office and visit physically or do you just like email and…? All of that stuff would probably be some algorithm that would say, “This person has this complexity.”
Ryan Isaac: Complexity score. Their complexity score.
Reese Harper: In certain points of their life, there would probably be fixed costs that you could just charge against that level of complexity with some kind of a kicker. Right?
Ryan Isaac: Yeah.
Reese Harper: There was like, “This is what it costs, but if you can help me do better or grow more or make smarter tax decisions, there’s some kind of a kicker.” In that theoretical world, it’s like, “Yeah, that makes sense. We all agree with that.” But I guess that my point is I feel like where I’ve arrived personally and what I believe the best compensation model is, is basically what I just described. That is what we have built in our business and it does exist. It’s just, you wouldn’t think about it that way. You wouldn’t think about it if I described it that way. Because really what we’re saying is it’s a combination of some fixed fees, based on complexity and a kicker that is based on how wealthy someone gets.
You could measure wealth by someone’s net worth and say, “Well that’s where the percentage should be charged against.” But net worth is just real estate equity, business equity and liquid cash and securities. That’s basically what it is. It’s either businesses, real estate and liquid stuff. Well, do you really want your financial adviser appraising your real estate and then saying-
Ryan Isaac: I get-
Reese Harper: …Wait, wait. Before, just let me explain this to you. Have you ever heard this before?
Ryan Isaac: No. I’m okay. Yeah. Let’s go.
Reese Harper: Do you really want your financial adviser to appraise your real estate and then tell you, he gets paid now because he appraised it and it’s worth 200,000 more, and he’s like, “Sorry, that’s why I gave you advice on all these properties, we’ve been talking about multi-tenant housing-
Ryan Isaac: It’s crazy.
Reese Harper: …and you bought the rentals and-
Ryan Isaac: they’ve gone up.
Reese Harper: …They’ve gone up a lot. I just made like an extra five grand.” And you’re like, “Well, the market went up. You didn’t make it go up.” You probably don’t want to pay your advisor on that part of your net worth, and then what about your business? Is your adviser responsible for growing your collections? Your financial adviser, did he grow your collections?
Ryan Isaac: Or you do the work every day, you manage your team.
Reese Harper: He doesn’t really do that. And he’s not really even a business consultant. He’ll give you ancillary business advice because he just sees stuff all day, but his job is to grow your net worth. Most of what he can control are taxes, savings, debt and spending and investments. Like he control investments and your savings and your spending and your taxes and all of that stuff can be measured best by your liquid net worth.
Ryan Isaac: Yeah. [crosstalk 00:41:33]
Reese Harper: Your cash, your securities. The only thing in net worth that a financial advisor’s not getting paid for, is he’s not getting paid in your real estate and your business equity, which he probably shouldn’t get paid on in the first place. In this ideal theoretical compensation model that I talked about, where you’re paying your advisor a fixed fee for a certain complexity, and a kicker for making you grow more, that’s basically a fixed fee model. I think it should be paid monthly so it’s more palatable for people, and then the kicker should come in the form of making you get more liquid securities and more retirement accounts and making those grow more because that’s what the advisors involved in.
Ryan Isaac: [inaudible 00:42:17]
Reese Harper: Can control directly. It’s a really close correlation to wealth. It’s quite close. Our clients, if you look at how much wealth they have at the end of their career, the majority of their wealth is in their liquid securities.
Ryan Isaac: Yeah, that’s true.
Reese Harper: They need it that high because they’re not going to spend down their house equity for the most part, and they’re not going to spend down their business. They’re going to sell their business and it’s going to turn into liquid securities, and then they’re going to spend all of that liquid securities and retire.
Ryan Isaac: Suffer in the future.
Reese Harper: Say, a charge against… an asset management fee that’s charged against liquid investments to me, is as close as you can get to charging someone for their actual wealth growth and then a fixed fee should just correspond to the level of complexity they have around tasks.
Ryan Isaac: Around the… yeah. Set of revolving tasks.
Reese Harper: Yeah. They’re really young in their career. Then they need to have certain revolving tasks be completed for them. If they’re in the middle phase of their career, they may have certain revolving tasks and if there’s the latter phase, it changes slightly-
Ryan Isaac: And it’s different if you have one practice that was 10, five I mean.
Reese Harper: Yeah.
Ryan Isaac: The tasks are different.
Reese Harper: Then if someone has a ton of money, and you’re getting paid that AUM fee, you don’t need to charge them that fixed fee anymore. It’s just the bigger someone gets, the fixed fee can go away, and I think that is the best way. That way you’re not selling products, you’re not getting paid by vendors, you have some flat fees that you can depend on, and then occasionally if there’s these problems, like one off [crosstalk 00:43:44]
Ryan Isaac: You have a project or something.
Reese Harper: …projects, then you could do that on an hourly basis and that’s fine. I just think there’s a lot of models out there. Obviously you can tell I’ve got a bias and my bias is the way we’ve ended up building our business. I do think that no matter how you pay your advisor, I think it’s important to know that these different models are out there, and it definitely affects the intelligence of your advisor and it affects their progress and what they’re going to learn.
Ryan Isaac: Where they’re going to spend their time.
Reese Harper: It effects how they’re going to spend their time and what they’re going to-
Ryan Isaac: How much they’ll care.
Reese Harper: …Show you-
Ryan Isaac: How quickly they’ll pickup the phone [crosstalk 00:44:16]
Reese Harper: Service your case. If they have three people that have called them exactly the same time, who they’re going to call back. It affects all these matters. I think what you want to have is you want to have a fee that is fair, that compensate your adviser well so that they can be there to do things for you proactively throughout your life because I can promise you this, if your financial advisor has a job and they’re paid well and they like you and you like them, you’re going to be wealthier. They are going to help you move faster than you could move on your own. I’ve seen that with hundreds of cases.
If you’re taking this burden all on your own, it will move slower. It’ll feel like you’re saving money because you’re not going to be paying anyone to do anything, but you won’t be making progress as quickly. Just like if you did your own book-keeping or if you did your own estate plan, or if you know how you could go online and get this stuff done, you can enter your book data, but it’s not going to be happening proactively and you’re not going to get to the point where we’re making good decisions quickly. I think that ideal model really is some combination of fixed with an AUM fee, and I think it works out really well. I think we got to give some people some followup here.
Ryan Isaac: Yeah. One thing we want to mention to everybody is that we have a new YouTube channel. You’d find us at Dentists Money Show on YouTube. We would love-
Reese Harper: That’s great. You got to admit.
Ryan Isaac: We mainly [soar 00:45:38] in the middle of a beard growing contest. You can actually, instead of hear it, you can see who’s winning except for mine’s red. I think I’ll always win.
Reese Harper: I actually trim mine every day and he does not.
Ryan Isaac: It’s going to get trimmed. Dentist Money Show on YouTube. It really, really cool to have some subscribers there. We put all of these episodes in video format on YouTube. If you want to get a whole list of the episodes that are online, you can do it through iTunes or you can go to our website at dentistadvisors.com/listen. If you want to talk to us, at dentistadvisors.com there’s a link at the top of the website. You can schedule in our calendar or you can call the phone number which is-
Reese Harper: 883-DDS-PLAN.
Ryan Isaac: 883-DDS-PLAN. Thanks everybody.
Reese Harper: Carry on.Advisors