Work creates money, and money is buying power. It truly cannot be overemphasized. Show me work, and I will show you value being created in the form of increased buying power. Why do stocks prices go up? Because someone did work. At Apple for example, the employees are paid to get up, shower, get dressed, go to their stations, do some work, that at product sale creates more value than the costs involved in the process. That pay is analogous to a fee, which is reflected in the cost of the product. If you avoid that fee the work does not get done and the product is not in front of you for purchase. Show me work, and I will show you money creation. No work – no money creation. Gold - no money growth or creation (gold is a store of value). Home equity – no money growth or creation (also a store of value). Bonds – no money growth or creation (the interest growth merely pays back the time value in the opportunity cost loss). Stock – MONEY GROWTH AND CREATION!! When work is being done, growth of value through the creation of MONEY is occurring.
Financial firm management fees are the same – they enable specialized work, that creates value in excess of cost. I know that I am always in danger that clients will look at their fee statement and decide that it is merely an expense, and that a cheaper version of SFS would work as well. I have lost clients who seem to have bought into that idea, occasionally with the help of professionals who helped talk them out of a full-service firm in exchange for a lower fee version. The idea of the superiority of low fees is touted everywhere: LOW FEES are the key! Look to REDUCE the fees to manage your money! That is the BEST choice! Unfortunately, that tempting argument is simply wrong.
That a low-cost approach could do as well as a full-service firm is simply not likely. Possible? Perhaps. Likely? No, and I would say nearly impossible. Why? Every lower cost firm or product is able to achieve the cost reduction by:
- Doing less work than a full-service firm does or is able to do (less work gets done)
- Doing it by paying people less which leads to less qualified people (less value in the work accomplished),
- Spreading their effort over more clients forcing less time focused on your needs (less work gets done)
- Using less capable software (does less or takes more effort from the client)
These choices inevitably create less value (often a lot less) as they result in less or lower quality work, but in ways that can be frustratingly difficult to see. It is hard to “see” the work being done unless you know how to look for it. Too often, a client wants the “value of the work” to show up in portfolio returns. While some of it does, returns are more a case of optimizing the assets to risk demands of the client. But if I have to “justify” the value of our work on the returns – it will not happen. I have said many times that the value of portfolio management is low, perhaps 0.25% or less than ¼ of our fee. We sometimes reduce expected returns of a new client on purpose as they may have way more risk than needed or are overfunding goals and can let up on the gas pedal for a smoother ride.
So where does our value show up? In a multitude of ways that rarely show up on a statement from Schwab or SFS but often DO show up in eMoney. Do you know why our clients receive a “Statement of Net Worth” in their annual documents? Because that is a much better estimate of the progress of our work than a portfolio statement. Since it is nearly impossible to put a “Value Created this Quarter” Metric on your statement, please allow me to share a short list of just some the values we are creating for you and others:
- We “tidy up your house”.We consolidate accounts and custodians to simplify your system of creating wealth. We get’r’dun. It takes us months sometimes to get 10 shares of UAL from Computershare to the taxable or battle the endless traps Vanguard puts on their funds to prevent a rollover. We help create, complete, and verify these transfers, using mailers and electronic documents to make the process as painless for our very busy clients. When issues come up, we run down the answer and determine a solution so you can live your life and not get bogged down in the paperwork.
- Talking you out of that rental house that stands out in the rain and depreciates, destroying net worth in the future sale, or destroying cash when I get the “Gene I need to repair the roof on the rental” call. Ugh.I hate rental houses with a passion, since I have watched them TRULY HURT my clients. I now refuse to take new clients with single family rentals. It is too painful to watch the losses until the client finally realizes the problem.
- Ensuring that you do NOT use tax deferral constantly, but use Roth accounts which forces assets FROM your portfolio and TO the IRS.Remember this does NOT hurt you, in fact it helps you and is the right advice despite a negative impact on SFS AUM and fees. The tax liability is AUM I could get paid on, and you cannot keep it anyway. If I reduce my firm’s fees to ensure you do a cash neutral transaction, it had better be superior or it makes me just stupid.
- Making sure you “Eat your financial vegetables”.That you fill out your beneficiary statements properly, that you change them when you get married, that you do get a trust for your minor children, that you finish that 401k change after a big raise, that you complete trust -medical directive – durable power of attorney paperwork as you age. We ensure that the “best of intentions” is replaced by “relentless process”.
- As you approach retirement, you may be getting good at the “accumulation process”.Let’s see, I save a portion of my pay, invest it in a low-cost asset, ignore the market, rinse repeat – maybe Jim Kramer was right I CAN DO THIS!! Let’s get rid of SFS and those costly fees. Well, just around the corner is a completely reverse problem – Distributions. They require a very different approach, or you can end up concentrating risks, triggering IRMAA tax penalties (What is that? Exactly), use the worst account first and the best account last. The list goes on.
- That you don’t pay off the house early when the value is more than 25% of your net worth – but instead flood money to the Roth, post-tax PRAP, or the RHA to trigger transactions that can triple the value of the cash supplied. Few things will hurt a retiree faster that a house payoff that destroys cash on hand. Improper or unhelpful debt-servicing is the single biggest mistake my near retirees make.
Maybe you say “But Gene, I have used so little of that over the last year. Perhaps I am paying for a Mercedes Benz when a Chevy would do”. Have any of you ever been in a Mercedes? Did you think “man – what is the hype?”. I never have. I have noticed the quality of the work done in the Merc every time. Not that Chevy doesn’t make a nice car but you tend to get what you pay for in life. Even GM knows Cadillac needs to be a separate brand for a reason. Free, cheaper, or less expensive are usually synonymous with “worthless, cheap, and less capable” respectively. Cheaper and better is usually a “Disney” wish – a hope your heart makes. Having us watch everything at all times ensures when the fat pitches come right down the middle of the plate - we stand ready to signal you to “swing away” and put it in the bleachers. We are not as distracted by your life and can ensure opportunities are not missed as we have the advantage of watching dozens of financial lives to learn hundreds of small and large ways to help you over time. Further, we have the time to slow down and talk to you about those issues as we are not spread too thin to notice OR call.
The blunt version – the fee makes it worth it to help you. If it was less, and we would think of other ways to spend our time and effort. We would require you to have more than a certain amount of AUM (what other firms do) instead of being more pragmatic that small accounts are extremely important to you and will become bigger someday. With our help that process will be faster and more effective. Work creating value – for both of us. It truly cannot be overemphasized!