The Cost of Financial Advice: Should You Pay For It and If You Do, How Much Should You Pay For It? (EP.20)

Episode Summary

Executive Summary: Episode 20 centers on the value and pricing of financial advice, using market volatility, a viral tweet on controllable life factors, robo-advisor portfolio construction, and evidence on stock-picking risk to argue that low fees alone are not the full story. The hosts conclude that advice is valuable for many clients, but do-it-yourself investing is appropriate for those willing and able to do the work.

Main Topics: Pricing and value of financial advice (Priority: 5/5): The core discussion asks whether advice should be charged as a percentage of assets, hourly, or a la carte, and what clients actually receive for the fee. Market volatility and investor behavior (Priority: 4/5): The hosts revisit common client concerns about high markets, recent drawdowns, and normal return patterns, emphasizing that short-term discomfort is expected. Robo-advisors and conservative portfolio recommendations (Priority: 4/5): They critique robo-advisors for often defaulting to more conservative portfolios, likely due to compliance constraints and concerns about client panic. Asset allocation as a controllable life decision (Priority: 3/5): A tweet listing controllable factors in life sparked discussion of asset allocation as a key lever investors can control, alongside health and relationships. Active vs passive investing and product marketing (Priority: 4/5): The episode contrasts active fund sales pitches—especially in fixed income—with evidence from SPIVA and flow data showing passive investing’s dominance and persistence. Risks of individual stock picking (Priority: 5/5): The hosts cite academic evidence showing that most stocks underperform and that a tiny minority drive nearly all market gains, reinforcing broad diversification.

Key Arguments: Advice pricing should reflect the scarce, high-value service being delivered, not just asset gathering; clients may be paying for access, judgment, and behavioral coaching, not simply portfolio implementation. A la carte or hourly pricing can make costs explicit, but may create friction, reduce ongoing engagement, and shift the burden of knowing what service is needed onto the client. Robo-advisors may recommend conservative allocations because suitability rules require considering investor knowledge, and firms may be trying to reduce the risk of client panic during downturns. Indexing does not appear to create greater bailout risk by itself; investor type and behavior matter more than whether portfolios are passive or active. Most individual stocks do poorly over time, so the expected benefit of broad diversification is substantial and stock picking is statistically a low-probability strategy. Market downturns and mediocre recent returns are normal, so investors should judge outcomes relative to expected distributions rather than recent experience. The hosts argue that good advisors add value by keeping clients invested, helping with planning, and guiding behavior—especially when emotions run high. DIY investing can be appropriate for knowledgeable, disciplined people, but overconfidence and action bias make many self-directed investors vulnerable to mistakes.

Data Points: Podcast episode: 20th episode - This installment of Rational Reminder is framed as part of an evolving format. Tweet engagement: 199 retweets and 698 likes - Benjamin Felix’s tweet about controllable life factors unexpectedly went viral. DFA global 60/40 portfolio return (end of October): -3.04% year to date - Used as a benchmark to show that recent weakness was modest in historical context. DFA global 60/40 portfolio return (Nov. 9): -1.79% year to date - Illustrates a bounce back after the earlier decline. Expected return gap from 50/50 to 100% equity: 1.25% - The hosts estimated the implied opportunity cost of being placed too conservatively. Wealthsimple portfolio result: 50% equity - Benjamin’s test of the robo-advisor questionnaire when he claimed low investment knowledge. Wealthsimple portfolio result with high knowledge: 80% equity - Same questionnaire produced a more aggressive allocation when knowledge was increased. Passive mutual fund inflows (US): Positive every year from 1993 to 2017 - Used to argue passive investors have historically been patient and persistent. Active mutual fund flows (US): 3 years of net outflows since 1993 - Contrasted with passive inflows to show relative consistency of passive investing demand. Stocks in CRSP database with buy-and-hold return above T-bills: 42.6% - Shows that most individual stocks underperform even a risk-free benchmark over their lifetimes. Share of market return driven by stocks: 4% - A small minority of stocks accounted for all net positive US market return since 1926. Russell 3000 stock sample: 13,000 stocks - JP Morgan study sample covering stocks that appeared in the index from 1980 to 2014. Stocks suffering unrecovered severe drawdowns: 40% - Within the Russell 3000 sample, these stocks had at least a 70% loss that was never recovered. Advisor fee schedule: 1.00% first $500k; 0.76% next $500k; 0.62% next $1M; 0.33% above $2M - PWL’s tiered advice-and-service pricing was disclosed for context. Benchmarking/market share claim: 76% of ETF flows to Vanguard and BlackRock - Cited to show concentration in passive fund flows.

Pivotal Quotes: "Volatility is the price you pay for long-term prosperity." — Cameron Passmore: Used while discussing market drawdowns and why recent declines should be viewed in a long-term framework. "The important things in life that we can control: diet, exercise, sleep, relationships, and asset allocation." — Benjamin Felix: The tweet that sparked a larger discussion about asset allocation as a controllable input. "If no one complains about your price, it's too low. If almost everyone complains, it's too high." — Ben Carlson quote cited by the hosts: Referenced to frame the pricing discussion and how much resistance is appropriate.

Implications: Listeners should focus on what they can control: diversification, costs, behavior, and whether they truly need advice. The industry’s future likely includes more modular pricing, but trusted, high-touch guidance will remain valuable for many clients.