âIf your motivation is to get paid, the way you get paid will subconsciously determine the advice you provide,â argued Rick Ferri, founder and CEO of Ferri Investment Solutions, in an interview with ThinkAdvisor. “Incentives drive advice – always.”
Ferri, 63, who has been a financial advisor for 32 years, is trying to influence new and young FAs to separate advice from portfolio management in structuring their compensation. In other words: don’t charge a fee – like the current 1% – based on assets under management.
âIt is a conflict of interest for an advisor to provide both advice and portfolio management,â said Ferri.
In the interview, he discusses what he sees as fairer alternatives.
The Chartered Financial Analyst and Trustee is a consultant to both individual investors and, under separate supervision, to advisers. He each charges $ 450 an hour.
Focused on index funds, he mainly advises DIY investors looking for confirmation of the sound management of their portfolio; and it helps pre-retirees plan distribution.
Ferri’s interview podcast, “Bogleheads on investingâ- supported by the nonprofit John C. Bogle Center for Financial Literacy – collects 30,000 downloads per month.
For investor clients, he provides what he calls âfinancial planning made easy,â but which nonetheless includes important advice on tax and estate planning.
He started as a broker with Kidder Peabody, before joining Smith Barney when Jamie Dimon was President and CEO.
He founded RIA Portfolio Solutions in 1999, selling the company to an equity investor 18 years later, in 2017, and forming Rick Ferri LLC. Two years later, he launched Ferri Investment Solutions.
ThinkAdvisor recently interviewed the outspoken consultant, who spoke by phone from his base in Georgetown, Texas.
He argued that advisers should not be entitled to a percentage of a client’s portfolio earnings, just as a CPA is not entitled to a portion of a client’s tax refund.
He then spoke of “the last bastion of gluttony in the investment industry,” followed by his performance forecast for active managers (think actively managed ETFs).
Here are the highlights of our interview:
THINKADVISOR: By bringing in advisors to separate advice from portfolio management, are you fighting a one-person battle?
RICK FERRI: No. There are a lot of other people saying that, a whole network trying to change the industry; we are not trying to change it.
You cannot change which advisors charge 1% and which ones do business on commission.
But many of them will end up getting less business due to the changing way advisors charge.
You say it’s a conflict of interest to provide advice and sell products and provide asset management services. Why is this a conflict?
If your motivation is to get paid, the way you get paid will subconsciously determine the advice you provide. If you select a product on which you receive a commission, for example, your recommendation to the customer will be to your advantage.
You’re going to convince the client somehow to do what’s right. your best interests. This is where the conflict comes in. Incentives drive boards – always have.
Do you think advisors bill fairly for their services?
Most charge way too much. It is the last bastion of gluttony in the investment industry.
For years, I managed a portfolio for a quarter of a percent, and we had a profit margin of 30%.
How in the world of good conscience advisers charge clients 1% or 1.5% per year for literally the same thing is beyond me.
If he has a client with a million dollar 401 (k) turnover and charges him $ 10,000 a year to manage that portfolio and charges another client with a $ 2 million portfolio $ 20,000 he renews, what does the advisor do differently? The answer is absolutely nothing.
And if the $ 1 million portfolio grows because the market grows, the advisor will now get $ 20,000. Why should they be paid $ 10,000 more per year because of this? The answer is they shouldn’t.
Are you trying to convince most advisors to unbundle their fees?
I know I’m not going to turn a 1% asset under management advisor into an hourly advisor or a fixed-fee advisor charging $ 8,000 or $ 9,000 a year to manage the money and give advice, whatever. [of] how much the customer has.
I’m trying to influence the new, younger advisers who haven’t yet decided how they’re going to structure their compensation. Charging 1% AUM is not the way to do it.
What’s the best way?