Yesterday, May 2nd, 2019, KFG financial planning clients received an invoice for the 1st Quarter outsourcing charge we initiated as of January 1st, 2019. This fee does not apply to our clients that are “investment only”.
We have received questions from a few clients that were taken by surprise by this fee and wondered why they were not notified.
However, this fee and the rationale behind it was thoroughly explained in our December annual fee letter that each client should have received in the mail. The fee was also addressed in the annual update to our firm brochure (ADV) as a material change and acknowledged in our offer letter of the ADV that was sent by email on April 3, 2019. Below, I have included the pertinent sections from the FAQ (Frequently Asked Questions) letter we sent in December which explains this new fee.
Should you have any additional question about this charge after reading this, please reach out to us at Operations@kahlerfinancial.com.
2019 Fee Change FAQ’s
Q: Can you tell me more about what an “Outsourcing Charge” is and why you are considering it?
A: One of the factors driving this increase is the difficulty in finding employees trained in investments. To fill this gap, we have increasingly outsourced the maintenance of our performance reporting software, rebalancing, and investment due diligence.
We are not the only investment advisory firm to experience the shortage of skilled help. Many firms like ours are turning to outsourcing non-client facing tasks. Outsourcing back office functions is becoming the norm in our profession. Larger firms and banks have done this for decades, where a team located in a larger metropolitan city support the local representative by doing all the back office work. Of course, outsourcing results in increased costs. Recent changes in our staff and with vendors mandate that we outsource additional back office functions.
Q: Why doesn’t KFG just absorb the cost?
A: Financial planning clients received deeply discounted investment services. A good rule of thumb is that 2/3 of your charge goes to compensating us for your comprehensive financial planning. This means our financial planning clients receive a huge discount on their investment advisory charge. As a general rule, most financial planning clients pay between .30% and .50% for investment advisory services. This is a significant discount over what we charge our investment-only clients. The bottom line is that KFG cannot absorb increases in providing these services to our financial planning clients. The outsourcing fee is absorbed by KFG with our investment only clients.
Q: Are there any benefits to the outsourcing charge?
A: While the downside is a small increased cost, there are a number of benefits that you will receive as a result.
- More attention and deeper expertise in the review and analysis of managers. We will have a team of investment specialists working for us.
- We will gain much more flexibility in designing customized portfolios. Examples would be excluding certain asset classes, building bond ladders, creating portfolios to fund certain goals, or offering different asset allocation models. Right now, we do not have the bandwidth to vary from our standard portfolios.
- New portfolio analysis software and tools that will help our portfolios produce risk efficient yields.
- Business continuation insurance. Right now, Rick is the source of our investment philosophy. By outsourcing we will have a team in place that can continue to execute on his 40 years of investment experience should he die prematurely. In that case, the team at KFG can continue to work in conjunction with the investment team to be sure your investments continue to follow our philosophy, managerial selection, asset allocation, and diversification.
- A better educated investment team.
- A more focused investment team who spend 100% of their time on investments.
- It eliminates the employee turnover and time spent by our staff on searching and training new talent. In addition, the added consistency from a team of specialists will increase overall efficiencies.
- Potentially lower expense ratios. In some cases, overall expense ratio costs could drop up to 0.20%.
- It also helps to free our staff to do what we do best and add the most value, which is financial planning.
Q: Does this mean you have outsourced all the decision-making on our investments?
A: No, not at all. We will continue to provide the high-level decision-making we have always provided:
- The design of your portfolio.
- The approval of managers.
- The selection of asset classes.
- The use of DFA, Vanguard, AQR, and our other managers.
- TD Ameritrade will remain our custodian.
- Orion will remain as our performance-reporting tool.
Because outsourcing happens in the background, you will not notice any difference in your investments or experience.
Q: Does this mean I will be paying more than I would be with other national fee and commission advisors?
A: Even with this small increase, our “all in” costs (advisor charges plus mutual fund expenses) are still below that of our competitors, who charge more and usually provide fewer services.
Q: Why are KFG’s “all in” charges less than average even with an “outsourcing charge”?
A: Let’s start with expense ratios (the fees charged by a mutual fund), which most people do not pay a lot of attention to but which can end up being one of the largest investment costs. We use managers that charge significantly less than average, which really helps to lower our “all in” costs. According to Investopedia, Morningstar’s average expense ratio for a 60/40 allocation is 1.30%. Our expense ratio on the same allocation is 0.63%, a savings of .67%. That is significant.
Q: Expense ratios are just part of the story of “all in” costs, right? You also have to consider advisory and other charges like outsourcing charges.
A: Exactly. According to a study done in May 2017 by Inside Information, the average “all in” charges on a $2 million portfolio charged by most large financial firms is 2.28%. Our average “all in” cost is 1.71% (1.00% + 0.08% estimated annual outsourcing charge + 0.63% expense ratio). This is 25% under the average fee paid to the average large financial firm, and most of them do not do comprehensive financial planning and in addition sell products and receive additional revenue via commissions. We sell no products to bolster our revenues and offer fee-only advice without any conflicts of interest inherent in firms that receive commissions from product sales.