"We Do Better When You Do Better"

Mark Meredith, CFP®

“We do better when you do better”, at least that’s the message from advisory firms that are proponents of asset-based advisory fees (i.e. 1% annually of your portfolio value). It’s a message that sounds good, but is it doing anyone any good? That’s debatable.

Over the nearly 5 years Meredith Wealth Planning has been in business, I have become accustomed to hearing a few common questions from prospective client’s regarding the firm’s flat fee model and limited staff. They’re usually in the vicinity of:

How could a firm of 1-2 people possibly have the research capabilities that are on par with a much larger advisory team?


What is your incentive to grow my money if you get paid the same no matter what?

Both of these questions are usually planted in prospective client's heads by other advisory firms competing for their business, and they both seem like completely valid questions to those who are not too familiar with the advisory industry (and they may seem like valid questions to those who are in the industry but are ignorant to the data).

The “Research” Question

How can Scott and I possibly possess the investment knowledge and research of say a firm with a thousand employees, an internal investment committee, and $100 billion under management?

The short answer is that most of those things are just a façade to extract higher fees from investors.

The longer answer is that evidence has shown for decades that stock/sector pickers, market timers, and active mutual fund managers generally do not beat an unmanaged benchmark index.

Data below from SPIVA shows that over the 20-year period ending 06/30/2023, 93.12% of all domestic actively managed funds failed to beat their benchmark index. What this means is that if you invested in a total US stock market index AND stayed the course then you would have outperformed 93.12% of professional investment managers over the prior 20 years.

I think most people would accept that to be a good result.

Once you account for the risk-adjusted returns, the results are even worse as these funds generally take more risk.

If that’s the case, is there actual value to the client in these research teams, consultants, investment committees, and trading departments? Or is just an added cost to the client?

It seems nearly every prospective client that walks through our door that is currently with a big brand name firm is invested in a litter of stocks and high expense ratio, tax-inefficient, actively managed funds. Why would that be when all evidence points to it being an inferior approach?

There are several potential answers to this question:

  1. There are conflicts of interest at these firms that cause them to use inferior products. We have done our best to eliminate all potential conflicts of interest at Meredith Wealth Planning.
  2. They are selling complexity in order to justify their higher expenses.
  3. They either do not know the data or believe they are the exception to the data, both of which should send people running away.

Going further, financial researcher Meb Faber showed in a 2016 piece titled “Which Institution Has The Best Asset Allocation Model?” that the portfolios offered by different firms were not all that different.

In the article Faber looks at the asset allocations from 40 of the nation’s leading wealth management firms and then backtested the returns using historical market data. Guess what he found?

From 1973 – 2015 the best returning allocation would have earned 9.72% annualized while the worst would have earned 9.19%. Those are not terribly different.

Faber showed that by simply adding a 1% annual management fee to the best performing allocation it turned it into the worst returning allocation.

While we’re referencing Mr. Faber’s wonderful research, just the other day he had a related post on CalPERS (the California Public Employees Retirement System). CalPERS oversees the largest pension fund in the country at over $450 billion in assets.

CalPERS has access to the best private investments in the world, the best asset managers in the world, the best research analysts in the world….and from 1985-2022 they failed to beat the risk/return profile of a basic 60/40 unmanaged index approach. All of those resources, for what?

So, do I think this two-man shop in the village of Maryville, IL can be on par with the nation’s leading wealth management firms? No. I think we can do far better if we simply avoid their mistakes and keep client costs reasonable.

Where’s Our Incentive?

To tackle the second question, what incentives do Scott and I have to grow our client’s wealth if we are charging a flat fee and not an asset-based fee (where if you make more we make more)?

It’s pretty clear from the evidence listed above that your financial advisor is not the sole determinant of your lifetime investment returns. The market itself does a lot of the heavy lifting as well as investor behavior (not panicking, staying the course).

Your advisor is not going to make your account go up faster simply because they get paid based on your amount of assets.

An advisor who helps their client design an appropriate, tax-efficient, low-cost asset allocation and stick with it through tough times has performed a wonderful service. Clients should also expect help in other areas such as tax and retirement planning.

So what’s our incentive? A client can fire us anytime they wish. We want to keep them happy and if we do bad work for people we would expect the business to do badly as well. Our incentive is trying to run a successful business for the next several decades.

Over the past 4+ years we have been quite blessed with many referrals from Clients, who have sent their friends and family members our way. I suspect people would only do that if they were happy with our service, and in that sense “we do better when you do better”.

Let’s flip this around, what’s the incentive of an asset-based fee advisor? The incentive from them is to gather and keep as much of your assets under their management as possible since more assets = more revenue. Let’s look at some scenarios where their incentives are not aligned with the Client’s:

  • Want to roll your traditional IRAs into your workplace 401k account so you can facilitate backdoor Roth contributions? That might hurt your advisor’s revenue.
  • Want to buy a new car and take money from your portfolio to do so? That might hurt your advisor's revenue.
  • Have an enticing investment real estate opportunity and need money from your portfolio? That might hurt your advisor's revenue.
  • Are you offered a lump sum vs. annuity option on your workplace pension? One of those choices enhances your advisor's revenue and the other does not.
  • Have you calculated your safe withdrawal rate is 4% annually but you're paying 1% to the advisor? There goes a hefty chunk of your potential retirement income.

The list goes on.

There really are many great financial planners out there who operate under an asset-based fee arrangement, but no financial planner is so good that a high enough fee can’t make them bad. Take a look at the numbers (hypothetical scenario):

Client A: $1 million invested for 30 years earning 6% annually minus a 1% annual asset-based fee.

Final balance = $4,321,942

Client B: $1 million invested for 30 years earning 6% annually minus a $6,000 annual fee that inflates at 1% per year.

Final balance = $5,216,014

Client B Final BalanceClient A Final Balance = $894,071

Compound your wealth, not your advisory fees.

Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a financial advisor before implementing any strategies. Past performance does not equal future results. Meredith Wealth Planning does not guarantee any minimum level of investment performance or the success of any index portfolio, index, mutual fund or investment strategy. The 6% return number used in the scenarios above and is purely hypothetical and not an implied guarantee in any way. You cannot invest directly into an index, and index returns do not account for real life fees and transaction costs.

Don't go through retirement alone.

Step 1) 30 Minute Consultation

A quick chat to get to know each other and learn more about what you're looking for in an advisor

Step 2) Think About It

We know that working with an advisor is a big decision, take some time & sleep on it

Step 3) Recommendations, Strategy, & Implementation

When you're ready, we get started with our planning process

Talk with a retirement partner today
A no-pressure, 30-minute conversation to see if we're the right fit for you
Schedule Your Free Consultation