Duke University Professor Attacks Advisor Fees, Says A Calculator Could Plan Retirement Better And More Cheaply

Thursday, September 01, 2011 07:34
Duke University Professor Attacks Advisor Fees, Says A  Calculator Could Plan Retirement Better And More Cheaply

Tags: financial planning

In an obviously provocative blog post, a Duke psychology professor blasts advisors for asking "circular and inane" questions and charging too much for faulty retirement advice.

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Dan Ariely teaches "behavioral economics," so his criticisms of standard retirement planning are purely psychological.


He wants to know why planners don't spend more time working with clients to make the tough decisions in terms of their spending.


But he also seems to think the typical retirement portfolio will need to replace 135% of a family's peak income in order to meet clients' planning goals.


Since advisors aren't guiding people toward that kind of portfolio, he then attacks the fee-for-assets compensation model.


"Why pay someone to create a portfolio that's 60% too low in its estimation?" he asked.


There's no discussion of how advisors are supposed to get clients with less than high net worth to that level, which seems strange to say the least.


Ariely does create an opportunity here for advisors to think hard about their value proposition. We know you're a lot more than a calculator and that your planning benchmarks are reality-tested.


But do your clients and prospects know what they're really getting for that 1% a year they pay in fees?


And do they know what goes into your planning assumptions, like why 75% of income replacement makes more sense -- for the typical advisory client -- than some other number? 


Comments (4)

Scott - are you a broker or journalist? Your last few 'opinion pieces' have lacked any journalist merit.

The reality is that Ariely is correct, and financial planning calculations prove such.

Stick with grammar and typeface, you look silly attacking Arierly and the DoL (earlier this week).
brentb843 , September 01, 2011

Thanks as always for looking out for me. Which bit are you objecting to? You might have more up-to-date financial planning calculations than I do -- last I heard, Roger Ibbotson hadn't been proved wrong in public yet.

Or is it the fact that financial planners don't deserve the standard 1% management fee? I'm more open to that one, but suspect it might be unpopular around here.
ScottMartin , September 01, 2011
Actually, I think what replacement level a client needs for his income in retirement depends entirely on the particular client's situation. If we are planning by "rules of Thumb" then the criticism is valid. I don't know of any planner in my circle who would treat a client to a rule of thumb planning experience.135% or 75% are entirely ficticious numbers. I have seen the range look more like 50% to 200% depending of the client and his circumstances. One client wanted to spend his retirement as a National Park Docent and move into a mobile home near a national park. He wanted to hike and camp on his off time. Does he need 135% of his pre-retirement income? Please! What clients need are planners who listen and help them map out their needs and find the resources to meet them. Our value proposition is just that -- a "Value" in the eye of the specific client. I find such comments from "experts" tedious at best and valuless at worst.
mitchellkeil , September 01, 2011
Scott - Both. And Ibbotson is not an advisor. I also have not seen Ibbotson create a widely used method that is materially different.

As I stated in the piece I sent to Andy, these calculations are like using a speedometer for a GPS.

I agree, the 135%, makes no sense, but I think Dan is correct on the 1%. Seriously, why should a person who just sends the clients assets to a TAMP get paid the more than the TAMP doing the work? Why should an advisor get paid the same 1% if not getting same result as another?

the reality is no planning software takes in the replacement value. So why charge 1% for a risk based portfolio?
brentb843 , September 02, 2011

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