A Fee, or a Tax?

Federal, State, Local, Social Security, Medicare, Net Investment Income, Capital Gains, Alternative Minimum, Property, Sales…to name just a few of the taxes that we routinely debate as either too high, or applied unfairly to the wrong group (BTW, nearly everyone thinks taxes are unfairly applied to themselves). Let me quickly review how I see the application of a tax. To me, a tax is something that is applied in a continuous manner, meaning that if you continue to earn money, income tax continues to apply. If you continue to buy things, sales tax continues to apply. There is no cap, except for the Social Security Taxable Wage Base. Generally speaking, taxes go on and on and on. Now, we must all agree some level of taxation is necessary, because we receive value in return. For example, our military is necessary to protect our freedoms. It’s also a good idea to have infrastructure as a developed nation, in the form of roads & highways, a system of courts, general governance, and so on. But at some point, everyone reaches their breaking point and fails to see valuable return on their taxes paid, essentially the law of diminishing returns.

Imagine if the federal government said that in addition to all the income  taxes referenced above, every dollar you have invested was now going to be taxed at a rate of 10%. Whatever you’ve saved and invested thus far, that’s the starting point. Further imagine all future growth and your additional contributions would have this same 10% tax applied. An ongoing tax levied against the balance every year. You save more, you pay more in tax. You invest in stocks that have traditionally gone up in value over time, you pay more. Absurd, isn’t it? Would it be absurd at 5%? Yes, I believe so. Would it be absurd at 1%? See where I’m going with this? Imagine, someone successfully building a $5 million dollar portfolio, and paying the federal government $50,000 each year going forward in the form of a tax, simply because they did a good job of saving and investing. How is that different than the traditional fee model that advisors embrace? 

I’ll answer on behalf of all the advisors out there I’ve angered. Their response would be “but look at all the value and peace of mind I provide my clients.” I too am an advisor and work every day to provide value and peace of mind to my clients. However, when a new client walks in the door and I need to determine the work needed to serve them, I evaluate the time and resources it will take to deliver our planning services. It becomes a function of complexity, not a function of their bank account. Said another way, the asset-based pricing of the majority of the advisory industry is nothing more than a weighing scale. Put your investment portfolio on the scale and they will tell you their fee. The more your assets weigh, the more you pay! When they tell you to save more money and you do, guess what? They get paid more. Can someone answer me this: How is that any different than a commission?

FACT: The amount of money you have to invest does not have a direct correlation to the complexity of your financial planning needs. So why do most advisors base their fee on this single factor?

  1. It’s easy.
  2. It’s how it’s always been done.
  3. 1% or 0.50% sounds tiny (and very few clients do the math to convert the % to $).
  4. It’s extremely lucrative because capital markets generally appreciate over time and clients save money by default because they are fiscally responsible.

Call it a tax, call it a commission, or allow the SEC to call it a “fee for service.” Ask your advisor tough questions. Make them talk in dollars and not seemingly marginal percentages. Find out what you’re paying. You might be shocked. Then find an advisor whose fee model makes more sense to you. The compound savings over time may be the difference between success and failure.


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