We were listening to episode 176 of the always excellent Kitces & Carl podcast recently and they almost saw the light, got so close and then missed it.
Michael Kitces and Carl Richards are two of the most high profile Americans in the world of personal finance. Each has his own output for advisers and clients. The combination of the two of them, makes for a power-house podcast.
In episode 176 they were talking about the desire most financial advisers have to say yes to helping everyone. This often comes from a good place, but can just as often end with them looking after too many clients, many of them unprofitable. The net result is poor service to a whole range of clients across a wide spectrum of wealth and therefore fee revenue. In fact some firms end up with more (by volume) loss making clients than profit making clients but the profits are so healthy on the profitable clients that can cross subsidise.
Of course, the solution to this is for the adviser to charge a flat fee and therefore exclude the clients it is least profitable to deal with. There will always be a flat fee adviser for every client no matter how much wealth they have.
Kitces and Carl acknowledged that this is a problem and suggested a solution from Morgan Rochard called the ‘Barbell model’. In essence this involves servicing a small number of high value clients at one end of the barbell and a small number of low value clients at the other end. The concept is that the high-value clients pay for the time spent by the adviser with the low value ones.
As an academic exercise this feels like it might work, but consider the practical outworking. If you are one of the those high value clients and you find that some of your fees are paying for someone else with less money than you to get the same advice, how would you feel?
The lower value client is not exactly a charity case, otherwise there would be nothing to advise them on. So you would be justified in querying why you couldn’t just pay less and the firm not look after these those other, less wealthy, clients.
If an adviser wants to help in their local community, then volunteering their time at Citizens Advice or Debt Charities would have a bigger societal impact. Taking on less wealthy clients and running them at a loss is surely more motivated by then hope that they will become wealthy through inheritance or some other life event and slide across to the other end of the barbell.
If you are a client of an adviser who charges a percentage fee, ask them how much their smallest client has invested with them and how much the largest has, ask them what the mean and median average investor has with them. See if you can work out which end of the barbell you are on.
Then go to our home page and contact one of the brilliant flat fee advisers featured to see what they can do for you.