Recently, a prospective client sent us a statement from another firm and asked:
Can you help me understand what I’m paying?
That sounds like a simple request, right?
The statement showed an advisory fee of about 1.9%. Is this high? Maybe, but not necessarily unreasonable. If an advisor is providing comprehensive planning, retirement guidance, tax planning, estate coordination, and ongoing portfolio management, there are situations where a higher advisory fee can be justified.
But the problem wasn’t the fee exactly. The problem was that “the fee” wasn’t the whole story. As we dug deeper, the advisor wasn’t actually managing the portfolio. The advisor had outsourced the investment management to a separately managed account provider (SMA), who had then invested the portfolio primarily in actively managed mutual funds.
In other words, the client wasn’t paying one manager. The client was paying three.
First, the advisor was being paid. Second, the SMA manager was being paid. And third, the mutual fund managers were being paid. By the time we added everything together, the underlying mutual funds carried average expense ratios approaching 2% on their own.
Suddenly, the conversation wasn’t about a 1.9% advisor fee anymore. It was about how many people were getting paid from the same dollar.
The Layer Cake Problem
Imagine hiring a general contractor to build your house. The contractor then hires another contractor, and that contractor hires another contractor. Each layer adds another bill. At some point, you start to wonder whether anyone is actually swinging a hammer.
Investment management can work the same way. Some advisors outsource portfolio management to third-party managers. Those third-party managers outsource investment selection to mutual fund managers. The mutual fund managers then hire teams of analysts, researchers, traders, economists, and support staff.
Every layer has costs. Every layer needs to get paid. And where does that money come from? That’ll be you.
The Question Nobody Asks
Most investors know what they’re paying their advisor. Far fewer know what they’re paying everybody else. Ask yourself:
- Can you identify every layer of management involved in your portfolio?
- Can you identify what each layer is costing you?
- Can your advisor explain why each layer exists?
- More importantly, can your advisor explain what has changed in your portfolio during the last six months and why?
Many can’t, not because they’re bad people or are unintelligent, but because they’ve outsourced the investment process. When investment management becomes somebody else’s responsibility, it’s difficult to have meaningful conversations about portfolio construction, market conditions, opportunities, risks, or changes being made on your behalf.
The advisor’s role often becomes little more than encouraging clients to stay invested and trust the process.
We Think Clients Deserve Better
At Forge Financial, every advisor has a hand in portfolio management. That doesn’t mean every advisor is sitting alone in a room trying to outsmart Wall Street. It means our advisors understand what is owned, why it is owned, and what role each investment plays.
We use established frameworks, institutional research, and disciplined processes to guide investment decisions. But we don’t hand the responsibility to someone else and walk away.
When clients ask why we own a particular investment, we can explain it because it’s all thoroughly documented. When they ask what has changed in the portfolio, we can explain that too. And when they ask how much current market conditions are affecting our thinking, we can have that conversation because we’re actively engaged in the process.
Transparency Matters
Investment management doesn’t need to be mysterious. Clients shouldn’t have to wonder who’s managing their money. They shouldn’t have to wonder how many people are taking a fee. And they shouldn’t have to wonder whether their advisor actually knows what’s happening inside the portfolio.
Good planning starts with transparency. Good investment management requires accountability. And both demand understanding exactly who is getting paid and why.
Before your next review meeting, consider asking your advisor this question: “Who is actually managing my money?”
The answer may tell you more than you expect.
Any opinions are those of Forge Financial and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
This includes a hypothetical situation and not indicative of any specific situations or client. It is presented only as an example and not intended as investment advice. Investing involves risk and there is no assurance that any investment strategy will be successful.
