I came across a very compelling and thoughtful post from a thought leader in the insurance arena I respect. In a recent post, the author, Brantley Whitely, asks are 134 fees better than commissions?
I think that the gist of his comment is that a ‘fee is a fee is a fee’ regardless of what it’s called. And whether it’s a commission or a fee, it’s all paid by the client in the end (though the CFP Board and NAPFA are not of the exact same opinion though). A client is seeking advice and help. And neither insurance companies nor financial service providers are in business long if a profit isn’t made.
His basic premise, as I read it, is not much different than that of John Bogle of Vanguard or the conclusion of a recent PBS Frontline documentary “The Retirement Gamble.” Fees can drain your account leaving the investor worse off. This is true of 401(k) plans as well as variable annuities though there has been downward pressure on the fees charged on these platforms.
As I noted in a comment I made on his blog, I believe that the difference between a commission and a fee may be more than semantics. Commissions are paid to agents who have a duty to an employer or other affiliated organization. A fee is the compensation that is paid to a fiduciary who has a duty to the client. At least that’s my understanding of the difference from speaking with others with sharper legal minds than mine.
I personally do not get into the holier-than-thou fee versus commission thing. Just wanted to point out this perspective.
On the substantive matter about the cost of the wrap account, I will say that it may make sense for clients who are seeking more active advice especially in certain areas of the market – markets that are not well-covered by analysts or special tactical approaches to managing money for instance.
That being said, I don’t use wrap accounts. I’m like many of my other RIA peers. We prefer to build out portfolios with low-cost ETFs. I do trade some positions regularly though. So the custodial fee cost certainly makes sense for the total services provided to the investor (0.20% per year for all trading and record-keeping).
Coupled with the typical overall cost of the ETF portfolios (usually under 0.4% per year and closer to 0.20% per year for the Vanguard ETFs used) and my cost (usually <0.80%), then this seems comparable but more transparent than the average cost of an actively-managed mutual fund (though it is still less than many such funds).
And this may be similar to the Mortality & Expense charge (M&E) for an insurance product – even annuities have this. I don’t think that there’s any altruism here just the reality that advice-based services need to be compensated from whatever the source as long as the client understands what they are getting.
Sure, an individual investor could cut out the middle man role of either an insurer or an investment manager by doing it themselves. But in reality, most consumers lack the time or interest. And if they’re like my typical clients, they’re asking questions about everything else – and investing is just tangential to the conversation.
With the reality of ‘robo-advisors’ out there charging 0.25% to 0.5% for an algorithm-based asset allocation, I believe that the bulk of an advisor’s fee – and more importantly – and VALUE is really for the advice not necessarily the investment management.
To see the original post, please visit: The Insurance Pro Blog.
