Bundled or unbundled which is better (or cheaper)?
Remember when your iPhone used to cost a lot less? Me too. Nowadays, if you need a new iPhone you have to pay full price for the phone without any help from your carrier. There are no deals. You used to get the phone for free, or close to it, but your monthly bill was much higher. When we were all bound by contracts the real cost of the phone was hidden in our monthly fees. Fast forward a few years and the cellular companies started a competitive race to the bottom on monthly fees. Who won? Hard to say, but it’s clear who lost out … the consumer. Now we all pay full price for our phones. On the bright side, at least we keep them for longer than we used to – a solid win for the environment.
This dynamic exists in financial services too. Whenever there’s fee compression clients pay the price both literally and figuratively. When it comes to the retirement plan market, fee transparency has long been an issue. Services that are commoditized are sometimes offered for free, while obfuscating other services that require more complex man hours and time. Now, clients find they are paying lower fees, but have an additional AUM (Asset Under Management) fee attached to their service, which was not the case initially. Vendors aren’t doing any additional work as the market value of the securities increases, but it allows the vendor to make more money in good times to offset what may happen down the road. Is that logical, or fair?
My hope is that eventually there will be full transparency with respect to fees in retirement plans and that clients will write a check for services which will be deductible. Only then can clients truly “benchmark” and compare offerings.
There is no such thing as “free” and bundled services should not allow a vendor to use one service to compensate for another. Unbundle and pay for what you need. You might be surprised at the positive results. Buying a la carte also allows you to extricate yourself from a single vendor with whom the relationship is no longer working (such as payroll, recordkeeping, financial advisory or TPA). One-stop-shop providers (big box companies) are not necessarily better, or cheaper, than individual providers. They just make it harder to understand exactly what you are paying for. Fee transparency will elevate the retirement planning space and liberate consumers to make informed choices about who they work with and what they’re getting.
Like our mothers used to say. “If it’s too good to be true …”