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Watching CNBC a while back, I was delighted to find a handsome, young man, Mark Matson willing to help folks save for retirement. Visiting his web site, I see that Mr. Matson, a DFA-approved advisor, is a video dynamo, appearing frequently on CNBC, Fox News, and ABC. He also has a weekly web broadcast Mark Matson TV with the slogan "Save the Investor. Save the World." Matson's wife, Melissa even maintains a Rich Chick web site with financial advice for "Sassy Girls." It all seemed very fresh and exciting to me, but is it a good deal for Matson's investors? Spending a few minutes on the Matson website, I found he does a thriving business coaching financial advisors on how to use his "Million Dollar Model" to increase their income by assessing management fees on their clients' portfolios.
As an early retiree, working "as little as one week per quarter" is particularly appealing to me. The "Million Dollar Model" seems to be an excellent deal for Mark Matson and the Matson-affiliated financial advisors who split an annual 2% of assets management fee, but what about the clients? Where are the customers' yachts? Doing a bit of due diligence on the Matson operation at the SEC web site, I find that Mark Matson's Matrix Asset Allocation has some $2.4 billion in assets under management from about 11,000 investors. Matrix Asset Allocation allows its affiliated financial advisors to charge an annual management fee of 0.99% to 1.40% on the first $500,000, 0.50% to 1.00% on the next $500,000, 0.40% to 0.75% on the next $3 million, and 0.25% to 0.50% on the portion of the client's account over $4 million. As an alternative to the tiered fee schedule above, Matson also allows its affilated advisors to charge a flat fee of 0.75% to 1.40% applied to a portfolio of any size. One interesting wrinkle to the Matson operation are the Free Market Funds. Instead of investing his clients' money directly into DFA funds, as is the practice of most DFA-approved advisors, Mark Matson created these three fund-of-funds portfolios that invest in DFA mutual funds while adding a 0.98% to 1.26% annual expense ratio on top of the expenses of the underlying DFA funds. It's an innovative way to skim a substantial additional fee from his customers. All new clients automatically go into the Free Market platform with its much higher fees. Only long-time customers have the option to keep their lower cost DFA funds.
Testimonials for the Mark Matson method I didn't see much from the clients, but there are dozens of glowing recommendations from financial advisors using the Mark Matson Million Dollar Model to dramatically increase their fee income. Here are a couple of my favorites:
Maybe it's just me, but I have a hard time finding anything "Christian" in a financial marketing model skimming a 2%-3% annual fee from the hapless client.
Comparing Mark Matson's Matrix Asset Allocation fees to other DFA-approved advisors If you go shopping for a DFA-approved advisor, you'll find a wide range of fees for this service. DFA advisors follow two basic models in assessing their portfolio management fees; a fixed annual fee that more or less correlates to the amount of time the advisor spends on the account, or a percentage of the assets under management (AUM) where the annual fee increases with the growth in value even if the amount of time the advisor needs to devote to the account does not. There are also two versions of the AUM model; 1) a straight percentage of the total account value, and 2) a tiered fee structure where the first dollar in the account is assessed a higher fee than the last. The table below illustrates the difference.
To examine the range of fees charged by DFA advisors, the SEC disclosure database was used to collect information on the firms in the table below. Firm size (i.e., Assets Under Management (AUM) and number of clients) was obtained from the latest SEC Form ADV on file. The schedule of fees was obtained from either the Form ADV or the firms' website.
If you're not careful, you could wind up paying tens of thousands of dollars for a few hours of the advisor's time. Assessing a client's risk tolerance and allocating a portfolio across 10 to 15 index funds should take a few hours at most for a competent advisor. Occasional rebalancing and tax-loss harvesting, perhaps an hour or two per year. Even a fixed-fee DFA advisor charging $2,000 per year could effectively be billing you $400 to $500 per hour for his time. That's more than you'd pay an attorney or CPA in most areas. For larger portfolios (say $5 million to $10 million), the most expensive DFA advisors charge annual fees in the range of $25,000 to $248,000. At this level, they'd really need to be providing you with a hundred hours or more per year of high-end, professional investment counseling and financial planning to make this look reasonable. If you can't get a good picture of what additional services they are providing, the man-hours associated with that activity, and who's actually doing the work (i.e., the advisor himself or the clerical staff), you're probably getting hosed. Over an investor's lifetime, a high-fee DFA advisor can capture a sizable portion of the client's assets for his own account. The chart below compares the cumulative fee collected over a 30-year period for the seven largest DFA advisors (in terms of client assets under management) examined. The most expensive collected over $2.4 million more in fees than the least expensive firm on the list. To perform this analysis, the DFA advisors' management fee was deducted from the account quarterly. For fixed fee advisors, an annual fee in the middle of the stated range was assumed (e.g., $3,000 per year for Evanson Asset Management) This fixed annual fee was then indexed for inflation by 3% per annum over the 30-year period. If you want to do your own analysis on a DFA advisor's fees, here's an Excel spreadsheet use can use. Click here.
Because of the effects of compounding, each dollar in fees that your DFA-approved advisor siphons from your account results in a $3 or $4 reduction in the value of your account over 30 years (assuming a 10% annualized investment return.) As the chart below illustrates, while there was about a $2.4 million difference in the cumulative fees collected between Matson Money's maximum flat fee and lowest cost advisor (Evanson Asset Management), Matson's account value at the end of 30 years was an astonishing $8.4 million less than the account value for the Evanson. Matson's maximum fee had literally chopped the 30-Year account value in half.
Are "high fee" DFA-approved advisors smarter than their lower cost competitors? Do they produce higher investment returns? Probably not. First of all, (as the chart above shows) a high fee produces a significant reduction the size of the client's account over 30 years. The $500,000 to $2 million in additional fees that a high-fee advisor siphons from the account creates a significant headwind to overcome just to get back to where you'd be with a low-fee advisor. Remember, while the advisor's fee is guaranteed by contract, the promise of superior results are not. An advisor's ability to extract an outsized fee from a client is more of a testament to his sales, marketing, and self-promotion skills than any superior investment acumen. To a large extent, a DFA-approved advisor's investment return is produced by the proprietary quantitative techniques employed by Dimension Fund Advisors in stock selection and managing the fund, and adherance to the Fama-French Three Factor Model in portfolio allocation (i.e., wide diversification with overweighing in small-cap and value equities.) While you'll find variations between advisors in the recommended asset allocation for a given risk tolerance, a recent paper from Duke University showed that no advisor can reliably predict the exact asset allocation that will produce a higher return for the next year. Analyzing the "high fee" DFA-approved advisor's sales pitch Low cost, fixed-fee DFA-approved advisors simply sell their services based on the cost savings. For high fee DFA-advisors, it's a bit more complicated -- especially if the potential client has any feel for the small amount of time it takes for a competent professional to assess risk tolerance and allocate a portfolio across 10 to 15 index funds. Most high-fee DFA advisors will first pitch a client with a "superior service" argument. Kind of like the way a high cost, full-service brokerage firm says it will "watch your money" a lot more carefully than a low-cost provider like the Vanguard Group. When that doesn't work, the pitch usually reverts to a time-tested fear appeal. Here are a few of the talking points:
What to conclude from this analysis? The wide range of fees charged by DFA-approved advisors offers potential clients considerable opportunity for savings. Especially for investors with larger accounts, the assets under management (AUM) fee model appears to result in an annual charge that's wildly inflated given the small number of man-hours required to manage a portfolio of 10 to 15 index funds. If a "high-fee" DFA-approved advisor can't give you a detailed description for what additional services he'll be providing for the tens of thousands of dollars in additional annual fees, it may make sense to hire one of his low-cost, fixed-fee competitors. Retirees making annual withdrawals from their portfolios in retirement have a special interest in limiting fees. For example, for a retiree taking a 4% or $40,000 annual withdrawal from a $1 million account, Matson would skim a worst case $14,000 annual management fee and an additional $10,800 in annual fees for the Free Market Funds -- leaving a bit more than $15,000 for the unwitting Matson client. A January 30, 2010 Wall Street Journal article had Mark Matson advocating the end of entitlement programs like Social Security and Medicare. On $15,000/year after expenses, even a millionaire paying Mark Matson's fees would need a generous monthly Social Security stipend to have any kind of reasonable lifestyle in retirement. Additional resources for further information -- Bogleheads Investment Forum (March 03, 2008): Comparing DFA money management fees My Money Blog (March 2006): DFA Funds: The Porsche of Index Funds Forbes Magazine (10/30/2006): The Index Insurgents Index Funds Advisors: The High Cost Of Low-Fee Advisors -- A high-fee DFA advisor uses the "fear appeal" to defends his fees. Evanson Asset Management: Fees and Services -- A low, fixed-fee DFA advisor explains why the high-fee guys are wrong. Financial Advisor Magazine (Oct 2002) DFA Advisors Clean Up. Financial Advisor Magazine (Mar 2001) Going Their Own Way. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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