Lies, Damned Lies, and Advisor Payouts
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“There are three kinds of lies: lies, damned lies, and statistics.”
This quotation is often attributed to Mark Twain, who allegedly attributed it to former British Prime Minister Benjamin Disraeli, who historians claim never said it.
Regardless of the origin of the phrase, it says that statistics mislead.
I could rewrite the quote: “There are three kinds of lies: lies, damned lies, and advisor payouts.”
I am not implying that brokerage firms that pay their advisors via a “payout” are lying, but there is no shortage of misleading when it comes to payouts.
A recent conversation I had with an advisor provides a cautionary tale.
This advisor is with an independent broker/dealer. I asked him what his payout is.
“98%,” he replied.
Hmmm, seems like quite the generous payout! But there is always more to it.
Turns out, he is with a super-OSJ with that broker/dealer, and, after its retention piece, his payout drops to 70%. (From which he still needs to pay a meaningful part of the local expenses of running his practice.)
As late-night infomercials remind us, “But wait, there’s more!”
There is an additional 15 basis point “platform fee.” This varies by client size but averages roughly 15bps.
The advisor explained that the client pays the platform fee, not him.
I reminded him that if he charges the client 100bps for his fee (roughly his average), and there is an additional 15bps “platform fee” on top of that, the client is paying 1.15% total. The client doesn’t care who receives what portion of that. They just know they are paying 1.15% total for the services they receive.
The advisor is only receiving 70% of the 100bps advisor fee.
Run the math, and the “payout” is 61% (70 / 115 = 60.9%)
61% is a far cry from 98%. Is the latter a lie or misleading?
The broker/dealer and OSJ provide support services to the advisor in return for the portion of the total client fee they retain. They have hard costs of providing those services, and as a for-profit business deserve to earn a profit. There is nothing wrong with that.
What is discouraging, though, is the convoluted way the total fee the advisor is being charged is being positioned.
It is paying the advisor a 61% payout and providing services of X, Y, Z in return. Why should that ever be expressed as 98%?
(Sidebar: Wirehouse advisors, you are not immune to this. For example, your 45% payout is surely not 45% at the end of the day. Factor in deferment of compensation, 0% payout on smaller relationships, penalty box deductions for lack of banking referrals, markups on SMA managers, etc. and the math isn’t any more sincere for you.)
After the pain of helping this advisor realize his 98% payout was really 61%, I compounded his anguish by suggesting he dollar-ize the amount his broker/dealer and OSJ were retaining.
A 61% effective payout means his broker/dealer and OSJ retained 39%. I explained he needs to take 39% of his current trailing 12-month production. This is how much in money he is paying each year for the services provided to him.
I asked him if the value and services he is being provided justifies the dollar amount he is paying.
Without detailing the self-reflecting misery that followed, it is fair to say that it is much more enjoyable to think you are receiving a 98% payout than to run this exercise. This demonstrates why broker/dealers play such games.
Ever wonder why “resort fees” have become so common at hotels? When the daily resort fee is mandatory, isn’t it part of the room rate? By separating those charges, hotels appear to provide more competitive room rates compared to their peers. Yet, all that matters is the total cost that appears on the final bill.
Seems curiously like “payouts” in the broker/dealer world.
If Mark Twain were alive today, statisticians would not be the only ones earning his ire. Broker/dealers would be quote-worthy as well.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.