A little rant now. If there is one thing in my industry I am sick of hearing, it’s this:
“Our percentage-of-assets fee model puts us on the same side of the table.”
Let’s stop talking about a fee-based model as if it is the holy grail. Yes, it is better than your advisor churning your account for commissions. No, it is not perfect (neither is my fee model). It’s this “same side of the table” stuff that gets to me. The root of this is the idea that by charging a percentage of assets under management, the advisor is incentivized to grow the value of the client’s portfolio. There’s only two problems with this.
1) That’s not the incentive given by an asset-based fee. The incentive isn’t to grow the client’s portfolio through investment returns. The incentive is to gather more assets. Preferably, these additional assets would come from the same client, so that the advisor can charge more fees on the larger portfolio for doing the same work. Otherwise the asset-based fee advisor will settle for finding new clients to grow assets under management, preferably the ones with the most money to invest, so they can be charged the highest fees. No one talks about a mutual fund having this “incentive” because they realize the best way to grow the fund is more sales, not better performance.
2) You can’t incentivize the impossible. Your advisor and I can’t control the markets. A well diversified, prudent, long-term portfolio is still going to be subject to some risk. Your returns will be the result of your asset allocation and market exposure, less fees. Anyone promising otherwise is making a sale that can’t be delivered. If I promise my two year old a snickers bar and a pony and if she solves a differential equation, I’m going to end up with a satisfied stomach, a pony and an unsolved equation. There isn’t anything I can promise her that will help her outperform her abilities.
Let’s just be upfront about it: the wealth management industry benefits from tremendous economies of scale that rightly belong to investors.
The Ridiculous Nature of Asset Based Fees