All Modes Of Advisor Compensation Scrutinized More Skeptically In the Consumer Press

Monday, December 12, 2011 11:51
All Modes Of Advisor Compensation Scrutinized More Skeptically In the Consumer Press

Tags: asset management | compensation | competitors | investment advisors | RIAs


Advisor pricing models were the subject of a story in this morning’s consumer press, and it gave all modes of compensation a skeptical review.
“For a long time, advisers mostly offered their clients only one way of settling a bill—investors would hand over a percentage of their assets under management every year,” writes Daisy Maxey. “With the economy in the tank, and more people than ever looking for guidance, advisory firms have cooked up new options for investors. Some offer flat fees or hourly rates, or weigh all of a client's holdings instead of just the size of the portfolio.”
The story makes it sound like hourly fees or a fee for advising on held away assets are something new when, in fact, these modes of compensation have been around for at least over a decade. But the coverage does reflect a growing skepticism in the press about advisors and greater scrutiny of all modes of compensation.
“With these new options, though, come new questions,” says The Journal’s Maxey. “What are the advantages, disadvantages and conflicts of interest in all of these new plans? What responsibilities do advisers have to their clients?”
These are good and fair questions, and the answer—the “nut” in the story— comes from academia and is a wise one.  
“There's no perfect form of compensation; each has its pluses and minuses," says Lukas Dean, assistant professor and program director for financial planning in the Cotsakos College of Business at William Paterson University in Wayne, N.J.
The story here is that the consumer press is asking intelligent questions about advisor compensation. It is no longer assumed that any one mode of compensation is superior.
I see this story highlighting a couple of longer-term trends. First, the days when doing business as a fee-only advisor differentiated you are over or, at best, nearing an end. Second, the press is becoming more skeptical in general about advisors and advisor fees and instances of advisor-bashing are on the rise.


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Comments (7)

I already added my comments to this story this morning. I think it comes down to earning your fees, rather than just collecting them....what have you done for your client lately?
On another subject, I just got a call from MoneyGuide Pro about their licensing fee. I just paid my annual renewal fee of $1,095 last week (I know...hard to belive the price right?). They just called up and said that I have the "wrong" license. Based on my business model, and the fact that I have a business partner, we need to be in a "firm" license rather than a "solo" license (which we've held and paid for over two years now). Not only did they raise their fee by about 10% over last year, now they want me to pay MORE based on my business model? When I asked what the additional benefit would be they came up with next to nothing (I could have my firm's brand on the web site?). I was having a pretty good day....but now I'm ticked. USED to love MGP, spoke highly of it on the web and at all conferences, but now its time to start looking at the alternatives!!! Never a dull moment...happy holidays!
timknotts , December 12, 2011
I agree with Tim's observation that we have to earn our fees. I know it seems obvious and probably insulting to have to repeat something as basic as Houseman's long ago TV ad mantra: "They earn it" when speaking about how EF Hutton held onto clients, but the truth is that clients exhibit all the signs of early onset Alzheimer's Disease. They never remember what you have done for them.
So, the real solution is not just to earn the fee every day BUT more importantly, to communicate what we have done "to" earn it every day. Perhaps we have grown to complacent. I spend a good part of each day emailing at least some of my clients with stories or commentaries that I believe will enrich their understanding of the economy or the markets or just to provide some uplifting momment. I also try to communicate each day with clients about their interests. I know, it takes a lot of time out of my day, but the result is that I am always in their space making known my interest in their well-being and their futures.I haven't had a client complain yet that I am communicating too much with them and it makes maintaining my fees and even increasingthem a lot easier conversation when it comes up, which is almost never, thank goodness.
mitchellkeil , December 12, 2011
Tim points out a great little fact that the consumer media seem to ignore - we have costs. It would be nice if we could be altruists (the purist form of fiduciary - no fees at all since paying fees isn't in our client's best interest???), but ALL of our service providers are a)charging us a bundle, and b) are raising their rates. I've actually had prospects (I wouldn't take them as clients) tell me they shouldn't have to pay platform/reporting fees, or pay for research, etc. as part of their fees, because that's just a cost of doing business. They want full service from us, but want to pay 25 bps (see Andy's story last week about a new threat to RIA's.) We must get better at explaining the value we add. You can't have your cake and eat it too; you don't get premium ingredients in a generic, bargain-brand product. Econ 101 - TANSTAAFL!
vguettlein , December 12, 2011
Very few prospects/clients are going to explicitly acknowledge that what they pay us for is to protect them from themselves. Or, in some cases, from other advisors who are trying to sell them on undeliverable promises. Half the comments on the WSJ article were from people who think the best form of compensation is performance based.
stvnrsmth , December 12, 2011
Ahhh, but the SEC doesn't condone performance-based fee billing for less-than-sophisticated investors.
vguettlein , December 12, 2011
Pressure on fees is the common problem underlying the comments above. Advisors who differentiate themselves by serving more sophisticated investors will do best in the years ahead. Financial professionals with wealth management credentials and knowledge, an investment track record, or great sales skills will be okay as investment advice is commoditized. As advisors will face growing fee pressure from growing competition from the Web and discount brokers, those are the advisors who will survive and thrive in the decade ahead.
agluck , December 14, 2011
Here's a question I wonder if the Web and Discount brokers will successfully answer when asked: "I am inheriting my mother's IRA; what should I do with it?" On a $250k account, for .25bps for the wrong answer, or 100bps for the right answer, the difference is.....? Up to 50% of the account value. Which is more important: the value of good advice, or a 75% reduction in fees? And that $125k in wasted account value would pay my fees for at least 26 years.
vguettlein , December 14, 2011

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