Cheap Trick

No, this isn't about the 70's rock band (still apparently going strong).  It is about a financial services industry cheap trick.

The lady was from Texas and called with a bit of concern in her voice.  She was selling land that had been in the family for a long time and was getting approximately $13 million.  In hand, she had a proposal to manage the $13 million and was seeking a second opinion.

The proposal wasn't from an asset manager but actually from an advisor who finds asset managers.  In other words, an asset gatherer.  He was from a large network of advisors who gather assets.  He is a middleman.  In other words, if you were selling or buying a house, you can go directly to a realtor or you can go to an advisor who would recommend a realtor.  If people fall for it, the industry would put on as many layers as they could get away with!

The cheap trick, in my opinion (you can make up your own mind), comes in the fee proposal:

As you look at this fee proposal, recall one of the well-known tricks discovered by behavioral finance researchers.  It goes like this:  if you want someone to donate $1, first ask for $2.  Then, after a pause, when you say you have a lower level of participation ($1), you are likely to get it.

Here, when the client is shown the big discount, it looks like they are getting a good deal with the much lower proposed fee.  What needs to be asked is how many clients this advisor has paying the "Standard Fee."  I would be willing to bet he has nobody paying 2.90% and 2.70%, etc.

At 0.98% of $13 million, the fee for 12 months would amount to $127,000 FOR THE FIRST YEAR!
The next question to put to the advisor would be who gets what?  My guess would be that the investment managers would get approximately 0.60% and the advisor/asset gatherer would get a cool 0.38%.

The rest of the proposal is just as laughable (or sad, depending on how you are looking at it).  The asset allocation is based on an 8-question allocation questionnaire.  The end result is 2 asset categories specified to 2 decimal places.  To the uninitiated, it looks very scientific.

But none of the questions asks about her goal for the funds.  In a short conversation with me, she indicated she intended a chunk of the funds was earmarked to go to heirs.  Did the advisor explain to her that her heirs have a considerably longer investment horizon and, therefore, assets intended for them should be invested in other than municipal bonds (especially given the 0.98% investment fee)!