Allan Roth’s day job is mundane: He’s one of the country’s 285,000 (per Cerulli Associates) financial advisors. On the side, he’s a fanatic. He campaigns against the forces of darkness that lurk on Wall Street.
Roth has picked fights with: A former SEC enforcement director, a rulemaking group for municipal bond brokers, a disciplinary board that went too easy on a fee gouger and a professional journal that published a statistically bogus defence of active fund management.
He won no friends in his own profession by satirising its marketing (he had his dachshund apply for, and secure, a plaque awarded for being one of ‘America’s Top Financial Planners’). If in some hideaway the life insurance industry maintains an enemies list, Roth must be near the top, given his loud denunciations of indexed annuities, which offer the illusion of riskless participation in the stock market.
Quixotic? Yes, but these squabbles are worth understanding. They are part of a larger battle over who manages the nation’s personal savings ($7.4 trillion just in IRAs) and how those wealth managers get paid.
The US Department of Labor has just issued a controversial rule that requires advisors on retirement accounts to act like “fiduciaries” rather than salesmen. If it isn’t blocked by Congress, Wall Street will probably cope by doing more of what it has been doing anyway: Reduce its reliance on sales commissions and substitute an income stream from percentage annual fees. At Wealth Logic, Roth’s solo-manager shop in Colorado Springs, Colorado, there are neither commissions nor asset fees. His subversive theory is that money managers should charge by the hour.
In the past year, Roth estimates, he has advised 100 clients on a combined asset pool of $1 billion. A typical engagement has the clock ticking for between 10 and 25 hours, at $450 per hour. So a $10 million account might run up a $8,000 tab the first year.
After that clients may come back for smaller doses of help if their circumstances change. Or maybe they’re ready to maintain a portfolio on their own, with an ongoing management cost of $0. “The goal is for me to get fired,” says Roth.
Contrast this frugal style with the 0.6 percent to 1 percent annual fee that would be the norm elsewhere. On a $10 million account at either a giant brokerage or a boutique investment house, the investor would probably be paying at least $60,000. That doesn’t include the expense ratios embedded in the investment products chosen by the advisor. Include them and the cost might balloon to two or three times that $60,000, year in and year out.
Roth, 58, took up financial counselling 12 years ago after a career in corporate finance. He does no prospecting and no proselytising. Clients either come to him presold on the virtues of passive investing or they get turned away. They are spread across the country. A lot of them have never met him.
The first order of business is a financial plan spelling out allocations, safe spending levels in retirement, and advice on mortgages, pensions, estate plans, college savings and the conversion of pretax to aftertax IRAs.
Then there is a cleaning of the stables. The objective is to replace messy and expensive investments with simple and cheap ones. The transition can be tricky. Do we want to get out of this overpriced stock fund badly enough to pay the capital gains taxes? What about that godawful annuity with the stiff exit fee if you leave too soon? “My business is the complexity of moving toward simplicity,” Roth says.
(This story appears in the 24 June, 2016 issue of Forbes India. To visit our Archives, click here.)