Could asset-based fees be a thing of the past?
Just maybe, according to a lively panel discussion late Wednesday at the spring meeting of the National Association of Personal Financial Advisors (Napfa) in San Diego.
Moderated by Bob Veres, publisher of the Inside Information website and a critic of AUM pricing, the pointed questioning of the AUM standard by the panel of hourly and retention-fee advisors was not a Napfa idea, but came from his own desire to stir things up.
“Financial planning is the free toaster” of the industry, said Veres, comparing it to banks that years ago would offer toasters for new accounts.
Likewise, advisors usually include planning within the fee charged for asset management.
“It makes no sense to throw in your core competency [for free] for something you can get a lot cheaper” somewhere else, said Roy Diliberto, founder and senior partner at RTD Financial Advisors, referring to the practice of charging for commoditized asset management while giving away the planning.
RTD uses a retention-fee model, which mitigates conflicts, Diliberto said. By way of example, suppose a client asked about investing $500,000 in a business venture. But before saying yes, an advisor couldn’t help but think about the revenue to be lost with that recommendation.
A similar conflict exists in recommending clients pay down a mortgage, said Carolyn McClanahan, founder of Life Planning Partners. She sometimes gives that advice in order to maximize home equity, which is protected from creditors under Florida law.
The perception among the public is that hourly fees are “the purest form of financial planning,” said Mark Berg, founding principal of Timothy Financial Counsel. “We don’t do any marketing—we’re answering the phone.”
“If fees are based on assets under management, that’s where the client’s attention goes,” added Jacob Kuebler, partner at Bluestem Financial Advisors.