Zero sugar. Zero emissions. Zero fees. The number zero is popular these days as people pursue more with less, and investment giants like Vanguard, Fidelity, and Schwab continually shave basis points from their expense ratios to remain uber-competitive.
The Wall Street Journal recently published an article about index funds and fees, mentioning that several companies offer expense ratios of 0.05% or lower, compared to the standard expense ratio twenty years ago, which was nearly 1%. Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said, “It is hell for issuers, but heaven for investors.” The average ETF fee is 0.55%.
There are more than 15,000 registered investment advisor (RIA) firms in the United States, and most provide similar services, like financial planning, investment management, and portfolio rebalancing. It’s challenging to differentiate one firm from the other because they’re grafted from the same tree of Modern Portfolio Theory (MPT) and observe the teachings of Harry Markowitz, Burton Malkiel, John Bogle, Eugene Fama, Ken French, and others who preach asset allocation, diversification, and low fees. They often quote Warren Buffett, Peter Lynch, and Daniel Kahneman, and their websites show pictures of giant compasses, sailboats, happy couples, giant buildings, or exotic animals, further blurring the distinction.
During my career, I’ve reviewed thousands of financial plans and investment accounts, and the portfolios are comparable unless managed by enormous brokerage firms or insurance companies. RIAs typically invest client assets in a globally diversified portfolio of low-cost funds, which include large, small, and international equity funds sprinkled with a few bond or alternative holdings.
I follow several firms on social media and realized our firm is a low-cost provider. We charge a half percent (0.50%) to manage client assets, about half the industry average of 1% to 1.50%. High fees and higher asset minimums hinder people seeking financial assistance and planning, so we removed these barriers. Firms charge a fee of 1% or more because they can; it’s the industry standard, so they can get away with it – if everyone else is doing it, so can we, a line of thinking with which we disagree.
In addition to our asset management fee, our financial planning fee costs $800, which we waive for our asset management clients. Many firms charge thousands of dollars or require a monthly subscription for financial planning. Still, you don’t need to pay exorbitant fees for this service, especially if your situation is not complicated.
Michael Kitces states the median asset management fee for a $1 million account is $10,000. In this same study, he references many ways to pay your advisor, including a retainer at $4,000, a standalone financial plan at $2,500, or an hourly rate of $250.
Our low fee does not mean no service, and we frequently say, “We’re half the price but twice the service of our industry peers.” We respond quickly to emails and phone calls. We don’t walk dogs, offer dry cleaning, or own an airplane, but we pride ourselves on excellent service and pass on our savings to our clients.
We have low fees because we manage our bottom line well and rely heavily on technology, allowing us to provide multiple services. For example, we can rebalance hundreds of accounts in minutes, assess a client’s risk tolerance, and review tax returns with the click of a mouse. We are data-driven and, when needed, outsource functions to other firms, like insurance and estate planning. We also say no to private placements, private equity, real estate syndicates, or expensive insurance products that charge high commission rates. Our competitive model and lean structure are suited for cost-conscious investors who want to invest wisely and save money. It’s not rocket science.
We don’t have a niche because when I started my investment career at age 24, I wasn’t connected to an affinity group or had access to money, so I worked with anybody willing to give me a chance. It’s in my DNA, and as a result, our firm helps anyone needing financial guidance, regardless of age, assets, or income, because it’s the right thing to do.
Others have criticized our business model, but it’s working. Since 2015, we’ve grown at an average annual clip of 32% and have been profitable yearly. And we work with clients in fifteen different states. We can scale and continue to grow because of our streamlined process.
We have already reduced our asset management and financial planning costs once and expect to lower them further as our firm grows. I believe the investment management process is becoming a commodity if it’s not already. Also, AI and computer-driven trading may also eliminate the need for money managers or active fund management, forcing lower fees.
Moral: If your advisor charges you 1% or more to buy a basket of index funds, it’s time to find a new firm.
When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.” ~ Warren Buffett
September 19, 2023
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice. Past performance is not a guarantee of future performance.
 https://www.wsj.com/finance/investing/you-might-be-paying-too-much-for-that-index-fund-a2458f24, Jack Pitcher, September 18, 2023
 https://www.kitces.com/blog/financial-advisor-average-fee-2020-aum-hourly-comprehensive-financial-plan-cost/, Michael Kitces and Derek Tharp, February 8, 2021