Yesterday I came across a piece in ThinkAdvisor titled “Why AUM Fees Still Make (Im)Perfect Sense” which you are welcome to go ahead and read.
Bob Clark, the author, makes a great point that I have also made: AUM (assets under management) fees are measurably better than commission-based pay for financial professionals. AUM fees have moved us away from product sales and towards independent investment advice. The industry still isn’t (and may never be) completely out of the commission game, but we’ve taken strides in the last 25 years.
But “better than commissions” isn’t a defense of the AUM model. And Bob lays out four points why he feels AUM fees are appropriate, which I will address in turn.
1) AUM fees can create a fiduciary standard. I suppose this is true if we are comparing AUM fees to commissions, but in no way do AUM fees allow for a fiduciary standard more than a flat retainer fee or hourly charges. In truth, the Registered Investment Advisor model and the Certified Financial Planner board have led to the increase in public awareness of fiduciary advice, but neither dictates the use of asset-based fees.
2) AUM fees put advisors on “the same side of the table.” I’ve address this argument before and generally I think it is nonsense. The line of “advisors get paid more only when client’s portfolio grow (sic)” is a half-truth at best. Advisors get paid more when they gather more assets, either from new clients, or, ideally for the advisor, gathering more assets from the same client. This way the advisor makes more money for doing the same work. You also can’t effectively incentivize a person to do the impossible. I could offer my border collie a handful of bacon to mow the lawn for me, but I’ll still be pushing the lawnmower. Advisors do not have direct control over the growth of an investment portfolio – markets, not managers, generate investment returns.
3) AUM fees create recurring revenue. While I’m not sure how this is measurably a good thing for clients, the same could be said about annual (or monthly) retainer fee structures, as well as hourly fees for annual financial “check-ups.” Accountants, attorneys, doctors and dentists don’t need to sell new products every year to drive revenue – they provide a service that clients value and pay for.
4) AUM fees enable independence. As I said before, I agree that the shift away from commissions has been good for consumers as it creates a less-biased environment for advisors to work in. But as AUM fees may allow for independence, it is only more true that retainer fees and hourly fees provide even greater independence, as they eliminate the asset-gathering/asset-retention conflict.
Lastly, I always find myself scratching my head when people in the industry claim that a retainer fee structure isn’t a viable business model. For one thing, it works for practically every other profession – CPAs, attorneys and others have long worked under an hourly or retainer structure to great success. Why should our fees be based on a client’s ability to pay rather than actually paying for the services they receive? I’d also suggest these people get in touch with me, Carolyn McClanahan, Steve Evanson, John Gorlow, Sandi Martin, Jason Hull and others who are living proof that a retainer or hourly fee model works well for financial professionals and their clients.