Are Clients Trading Behind Your Back?


Being a former engineer, I can be nit-picky when it comes to fees for services I receive. So I devised a way to game the AUM billing model from the client's perspective. This scheme is more applicable for firms that do not trade investments regularly and are oriented to passive investments over active management. Here's how it works.


Say a wealth management firm has a $500,000 account minimum requirement to bring on a client. Fine. A prospect interviews the firm, says she has $600,000 in investable assets, and decides she wants to enter a long-term engagement with the firm. The firm opens new accounts and transfers the assets to the firm's custodian and invests according to models and allocations determined for the client. Over a one-year period, this client generates around $6,000 in gross revenue for the firm.


But what the client doesn't reveal to the firm is that she holds an additional $1.5 million in assets in accounts with a leading retail brokerage service provider. When the client receives each quarterly statement from her wealth management firm, she directs the brokerage provider to mirror investments and allocations in the brokerage account to those shown in her reports. Granted, due to proprietary and/or fund access restrictions, a one-to-one correlation may not be possible, but I imagine similar securities or funds can be selected to mimic the strategy designed by the wealth management firm.


In the end, this client receives services "valued" at $21,000 for just $6,000 by hiding assets from the firm.


Ok, ok, I admit that this scheme is fairly far-fetched, but it makes me think seriously about how appropriate billing on AUM is as a revenue model for financial service firms. Yes, it's not ethical for the client to withhold asset information, plus it really messes up financial planning strategies; the client is really doing a disservice to herself in the attempt to save on wealth management fees.


But still, with services like's trade-mimicking platform emerging on the Internet, I believe it's just a matter of time before clients realize that there is often a large disparity between fees paid for services received under the AUM model. And if you think I'm completely out of line here, let me have it in the comments below.

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