Why I Don’t Manage Money

Hi there.

I don’t manage money, and here’s why. 

Let’s talk about how people in the financial services industry get paid. In most cases, financial services are provided under one of two models: Commission or AUM (assets under management). Let's quickly summarize what they are.

Commission models usually mean that the advisor is paid by the client or outside company for a transaction or the sale of a financial product. It’s extremely common in the insurance industry, where agents get paid when they sell a product. In most cases they are paid up front, but some are paid annually (trails). In the past, commissions on brokerage transactions were a lot more common, where the broker was paid for the trade that they placed. Now, with the vast majority of trades being automated, you can find brokerage services for little or no cost. 

AUM means that the client is charged a percentage of their assets that are managed by the firm, and not on a per-transaction basis. The advisor or firm may or may not have discretionary authority (the right to place trades without client approval) over the account, but it’s pretty common. Typically, that management fee is around 1% of total assets annually – it can run up to 2% or more – and it’s usually billed quarterly. There aren’t usually any long-term lock-ups of your money and advisors are rewarded by growing the balance, as their pay increases when the client’s balance increases. 

Both of these models have the potential to operate at the highest moral and ethical standards of what is right for the client in front of them. In an AUM practice, many advisors are fiduciaries, legally obligated to act solely in your interest. Unfortunately, there is a monetary incentive to provide “good” advice that pays more than “best” advice that pays less (or not at all). When the costs to the client are buried in the product, or hidden as a line item on a quarterly statement, it can sometimes feel like you’re not paying anything. And that can be dangerous.  

Introducing the third model: Advice-Only. This newer form of advice is actually a lot simpler than it sounds. Advice-Only firms don’t manage your money, they don’t charge a commission, and they don’t receive a commission from anyone for anything. Clients pay a transparent fee that isn’t hidden, and they receive advice that is in their best interest, free of all conflicts that come from selling products or managing assets. 

I’ve dreamed of being able to operate a business this way. I think it is the purest form of advice for people who are looking for expert guidance that isn’t tied to some kind of product or gated behind a minimum account balance. In the past I always felt like I was trying to convince people to do what was right, but I found myself feeling guilty because of what I would get paid if they agreed to go with the plan. And I would get frustrated if they took my advice and decided not to move forward with me (or went to someone else). Advice-Only is free of all of that. Clients who are seeking expert advice can get it for a clear cost. For those who aren’t interested, they can continue using the systems and firms that have been around for decades. 

I can’t wait to get started and see if I’m right about this. 

Until next time, God Bless.

Ian