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Rick Ferri, Back in Business, Drops Bomb on AUM Fee Model

By Bernice Napach

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Rick Ferri, the low-cost financial advisor and champion of index funds, is back. Three years after being frozen out of Portfolio Solutions, the firm he founded in 1999, by a new partner whom he subsequently sued, Ferri has opened a new firm.

He had to wait until a noncompete clause had expired on April 7 following an arbitration decision that ended the dispute and awarded Ferri more than $3 million.

Ferri Investment Solutions offers offers hourly, customized investment advice for individual investors; model portfolios for financial advisors, retirement plans, fund companies and other institutions; and consulting services for investment advisors, financial planners, or representatives of financial firms.

Ferri charges $450 an hour for investment advice to restructure or create long-term customized portfolios for individual clients but has a special introductory offer of $500 for a 90-minute session that is prorated if the session runs shorter. “You only pay for the time you need,” he says.

He connects to individuals by phone, Skype or online and rarely in person — “I haven’t found anyone who wants to do it in person” — and customizes portfolios based on what the client needs, starting with a conversation about how much they know about investing. All they have to do is email him through his website, then schedule a time slot after he responds with his calendar.

Ferri doesn’t do financial planning but will refer clients to a planner or advisor if they want one, excluding those advisors that charge high fees, which in Ferri’s view is usually an advisor that charges more than 25 basis points for accounts of $1 million or more.

“I find advisors all over the country that will take clients for 25 basis points from $1 million and up,” he says. “There are a lot of them.”

Ferri, who is a chartered financial analyst and fiduciary, is on a mission to unbundle advisor fees, for investors to pay for the services they need, such as financial plan or asset allocation. Citing a study by Michael Kitces, he notes that the cost of a financial plan is around $2,500 but advisors who get paid on retainer charge twice as much for a standalone plan — and advisors who charge a percent of assets under management continue to collect fees when the plan is already done.  

A client with $2 million paying 0.9% of AUM annually is told that half the fee is for planning and half is for investment management, but continues to pay $9,000 every single year for a financial plan that’s already done, explains Ferri. “You’re supposed to be a fiduciary,” he says, referring to that theoretical advisor. Noting the sharp decline in fees for asset management — “close to zero for index mutual funds,” Ferri says — “Everyone is seeing that advice is where the fat is right now. Financial advice is the last bastion of gluttony in the investment industry.”

He doesn’t want to hear from advisors who posit that their services are worth the “value added. Don’t tell me you’re better than the next guy because that’s not true.”

Moreover, says Ferri, what complicates financial advisory services is not the size of an individual’s account but the number of accounts — and custodians — involved.

Lower and more transparent fees for financial advice “is one of the waves that are happening now,” says Ferri. “Advisors who charge 1% to do planning and asset management will be under pressure to charge differently.”

Ferri believes in simple, low-cost portfolios, which he says many people can manage on their own. “They don’t really need an advisor. You can design something very simple that investors can check up on when they want.” And if they want professional help for that, Ferri can do it for his usual $450 hourly fee. For specialized needs outside his expertise of asset allocation and asset management, he will make referrals to experts in those issues, such as Social Security or estate taxes.

The simple portfolios that Ferri favors consist primarily of index ETFs, though index mutual funds are sometimes included, and four key asset classes — his trademarked Core-4 Portfolios — which can vary depending on the type of portfolio an investor desires. Six Core-4 portfolios are available for free on his website — classic (balanced), total economy, global markets, inflation, income seeker and ESG. All include U.S. and international stocks and U.S. bonds and half include REITs, and they are populated with funds from BlackRock (iShares), Fidelity, Schwab and Vanguard.

He also provides Custom Core-4 Portfolios for other advisors, retirement plans, fund companies and other institutions, for a negotiated price, based on use, along with possible annual licensing fees if the models are used in a for-profit business.

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Bernice Napach

@Think_Napach

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