When you are the client: Can someone explain why advisors bill themselves?

(November 2005) Suppose you have your neighbour’s teenage son mow your lawn every Saturday for $20. Assume one Saturday he couldn’t make it, so you had to mow the lawn yourself. Would you send yourself a bill for $20 and pay tax on the income?

Hopefully, we can all agree that paying yourself for services rendered for your personal benefit is a silly thing. People don’t pay themselves for doing their own taxes, mowing their own lawn or painting their own house. What about financial advisors who manage their own money (i.e., they have themselves as clients)?

My experience, in speaking with hundreds of financial advisors over the years, is that the very large majority of them use A Class funds for their own accounts. Let’s use a simple example. Let’s say you had $100,000 invested entirely in no-load equity mutual funds paying a 1% trailing commission. (By the way, please don’t call it a trailer “fee.” Prospectuses are very clear — the correct term is trailing commission). If this sounds like you, then you’re effectively billing yourself $1,000 a year in order to be your own financial planner. At a 70% payout, that would leave you with $700. After tax (why do almost all financial advisors assume the top 46.4% marginal tax rate on everything?), you could be left with only $375.20. Nice play, Shakespeare.

I thought financial advisors were supposed to help their clients make smart decisions with their money. Who do these advisors have helping them make smart decisions with their own money? More to the point, what kind of idiot would charge himself $1,000 just to be able to keep $375.20? Wouldn’t it make a whole lot more sense to charge yourself nothing? Not only would there be no leakage, but your portfolio would grow a whole lot faster. A 1% lower MER means your investment (the exact same fund or funds, only in an F Class format) will actually grow at a guaranteed 1% faster rate. Over the course of a lifetime, the impact is massive.

Aside from ethical questions surrounding the notion of treating clients the same way advisors treat themselves, why would any rational advisor, who helps his clients make smart decisions with their money, do something so utterly ridiculous as to buy A Class funds for themselves?

I have asked this question at advisor conferences and received silence as an answer. I have asked this question on website blogs and have received no responsible reply. I’m sure there must be a perfectly logical reason for it, but for the life of me, I just don’t see one. I am imploring advisors to please end the silence.

Of course, if my suspicion that there is no good reason for doing this turns out to be correct, I have another question for you. How can you possibly expect to have any credibility about helping other people make smart financial decisions when you, yourself are so totally illogical with your own money?

Maybe there’s a perfectly sensible explanation for all of this. I just wish all those independent, rational, logical, intelligent and, above all, professional financial advisors out there would let me in on it. I await your enlightenment.

John J. De Goey is a senior financial advisor with Burgeonvest Securities Limited and author of The Professional Financial Advisor. The views expressed are not necessarily shared by Burgeonvest. john.degoey@burgeonvest.com

This article originally appeared in the October issue of Advisor’s Edge Report .