The decades-old debate over which advisor fee model provides the most conflict-free advice to investors was front and center during a panel discussion sponsored by the Institute for the Fiduciary Standard this week.
The online discussion, part of the organization’s month-long activities to commemorate “Fiduciary September,” highlighted the practices of three advisors who have chosen to depart from the assets-under-management-only fee model to add project-only, flat fee and hourly fee compensation to the mix.
Institute President Knut Rostad said his organization is compensation agnostic, but thought it was important to explore how fee models impact the fiduciary relationship advisors have with their clients.
Almost all SEC-registered advisors (95.5%) charge asset-based fees. “These fees are structured as a percentage of client assets under management, which increase as the value of client assets increase and decrease as asset values decline,” the Investment Adviser Association said in its most recent snapshot of advisor practices.
But it is important to note that only 17.4% of advisors offer asset-based fees alone, the IAA said. Most advisors offer asset-based fees along with other types of fees, such as fixed fees, performance fees and hourly charges.
“On our end, we chose hourly-based financial planning because it’s the least conflicted model out there,” said Alex Offerman, a financial planning associate with Model Wealth, Inc. in Naperville, Ill., whose firm charges $300 per hour to provide project-oriented planning.
“Of course, there is an inherent conflict of interest whether it’s an hourly-based fee or AUM-based fee. So, we understand that and try to disclose that with clients in our first meeting,” Offerman said.
“We want to make sure we are open to everyone as long as they can pay our hourly fee. We don’t care if you have $100 million in assets or are in debt by $250,000. It doesn’t matter to us. We just want to make sure we are doing the best for that client and they understand the fee they pay us."
Offerman’s firm does offer investment management for a flat annual subscription fee to clients who have, either by themselves or with the help of their former firms, created complex portfolios that the individual will have a difficulty managing.
Adam Cross, who launched AMC Wealth in Chicago during the pandemic and has built it into a team of seven, offers both hourly and AUM fees, depending on what clients want and need. “By not limiting myself and offering services based on needs and the scope of engagement, I essentially eliminate all conflicts of interest,” Cross said.
Transparency helps. Cross advertises pricing on his website, offering advice starting at $200 per hour, up to $3,000 for 15 hours of coaching. The firm’s AUM fee, which he says works best for “retirees and ultra-high-net-worth families,” starts at 1% on a $500,000 portfolio, drops to .9% for $2 million and .45% for $10 million.
“Instead of me pushing options, I can ask a few questions and map the client to the appropriate service. I don’t lose any sleep at night worrying about conflicts,” Cross added.