Are Asset-Based Fees Becoming Obsolete?
May 15, 2015
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The times are changing. Thank the Robos and passive management. Most advisory fees are built around active management business models. Investors should be willing to pay higher fees for superior (beat the market) results. There is a major disconnect when passive management trumps active management. In our Registry, half of the advisors charge separate fees for planning (hourly, fixed) and investment (asst-based) advice. The other half wrap the two services together. Commission sales reps offer free planning to produce commissions when they “help†clients implement the plan with the sale of investment and insurance products. And, you wonder why investors are confused. Advisors have an incentive in an asset-based fee environment. If assets go up in value the advisor makes more money. If asset go down in value the advisor makes less money. Advisors also make more money from reinvested income and new money. What is best for the investor and advisor? Advisor should reflect their high fixed costs and low variable expenses. A minimum fee should cover the advisor’s cost of providing advice and services and produces an acceptable profit. The minimum fee is also a reflection of the advisor’s minimum asset requirement. This means there should be steeper declines in sliding schedules of fees. There is very little additional expense when professionals advise on or manage $5mm versus $1mm. More astute investors know this. Investors may be more knowledgeable in the future and they will have more choices. Now would be a good time to re-think all types of fee schedules. Jack
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Net Worth pricing? Seriously?
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I wonder how long the client will stay with an advisor that has absolutely no skin in the game. So an advisor charges a fee whether or not the strategy works or not? There is a reason management consulting firms began to charge performance based fees. Annual "consulting" fees provide no accountability to those giving the advice. Good luck with that model.
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Of course conflicts exist with a fee-based model. Conflicts of interest are inherent in ANY relationship, by definition. Two (or more) people exchanging one product or service for another can't have identical goals, remuneration and anticipated results. The most effective and clearly the most inexpensive way to obtain financial advice is to pay a commission, up front, with possible breakpoints. As a consumer, do so and you've just hired an advisor 24/7/365.