Why Paying for Financial Advice Makes Sense
From: nytimes.com
If you are lucky to earn more money than you need each month, there was probably a time when you could have used some advice about how best to spend, save and protect it.
But if you looked around for a big national firm that swore to do the right thing, you would not have found it. Doing it right means putting your interests first, investing in index funds or similar investments, making money only through reasonable fees and not commissions earned from pushing complex life insurance policies, and talking to you in depth about your entire financial life and your goals and dreams.
So when LearnVest came on the scene in 2009, there was cause for some optimism. The company’s goal was to bring financial planning to the masses for what is now a $299 upfront fee plus a $19 monthly subscription. Yet even with nearly $75 million in venture capital money to play with, it doesn’t have 10,000 customers signed up for its standard plan.
We know this because LearnVest reported that modest client number in the announcement late last month that it was being acquired by Northwestern Mutual, a giant insurance company. Northwestern Mutual has an army of 16,000 or so agents pushing things like variable annuities. So the announcement had the subtext of a kind of capitulation.
That brings up two questions: Why is it so hard for any start-up or established company to provide the right kind of financial planning to large numbers of people? And what is so wrong with all of us that we are unwilling to pay for the good stuff when it is being offered?
Traditional brokerage firms once made plenty of money through commissions that paid their financial professionals over the many years that clients held onto certain mutual funds. This was often quite bad for the clients, since those commissions were paid for with high fees that came out of their annual returns. It was doubly bad when the funds almost inevitably underperformed basic stock indexes like the Standard & Poor’s 500.
Meanwhile, insurance agents sold those messy annuities or investments wrapped in complicated life insurance policies. Here, too, the salespeople drew handsome compensation, but the customers would often have been better off buying some cheap index funds and holding them for decades while purchasing some simple term life insurance on the side for $50 a month.
Customers and financial advisers who saw the light sensed that the best way for consumers to pay for advice was to hand over money directly to the advice giver, perhaps on an hourly or monthly basis or by paying 1 percent of their assets each year. But as LearnVest has now proved, even at a superlow price, it’s hard to get enough people to do that to build a big company.
“If you wave a magic wand and give me 100,000 customers, I can design a business that runs profitably,” said Michael Kitces, co-founder of XY Planning Network, a competing network of financial planners that offers monthly subscriptions. “But I have no idea how to get to 100,000 without blowing the whole thing up.”
Even when the advice is truly free, people sometimes don’t want it. As Kenneth Feinberg, the administrator of the Sept. 11 victim compensation fund, wrote in The New York Times last month, just 78 out of 5,300 eligible claimants took up the offer of assistance from Goldman Sachs, JPMorgan Chase and others, even though many of them were receiving seven-figure payments.
So what is so hard about talking people into it? Admitting that you need help is hard. There is shame in having gotten money wrong so far, or shame that you can’t figure it out or shame that it’s taken so long to start.
The industry, with all its various conflicts and bad actors, doesn’t do itself any favors either. “Woe to us and our profession that we’ve made it so hard,” Mr. Kitces said. “Our standards are so low that we’ve brought this upon ourselves.”
Then, there’s the financial commitment, which is right there in all of our faces if we work with advisers who make money only through fees that they charge us directly. Planners who are part of the XY consortium must offer a monthly subscription, and Sophia Bera, an adviser in Minneapolis, directly tackles the challenge of explaining it. She says she pays $135 each month for unlimited yoga and other friends pay the same thing for CrossFit or cable. If you’re going to pay that much to care for your body and entertain your brain, then logic would dictate paying about the same amount to make sure you’re saving and spending your money in a safe way.
