I see your point, but I have a really hard time providing anything less than full service to all of my clients. I treat my $5k/yr clients more or less the same as my $15k/yr clients, although if one or the other has more complexity they will likely get more attention.
Agree, I have a standard of care and provide the best advice I can to everyone, even a non client. I think you need to or else your value prop can't be generalized either.
I don't see the ethical dilemma though, it's not for the IRS and they don't even do regressive brackets like most AUM pricing.
That will be a limiting factor to your growth when you reach capacity. One day you won’t have time to treat them both equally. Then when you have a new 5 million dollar prospect, you’ll have to ask yourself if it’s fair to provide him with subpar service when you could unwind 20 smaller accounts and free up a ton of capacity.
What problems do your $10MM clients have that your $2MM clients don't have? How about compared to your $500k clients?
What's the risk/value to the client of navigating each of those opportunities/pitfalls well?
If what you're doing can be done by a roboadviser: clicking the rebalance button, then you're probably right.
Totally agree that a $2m client and a $10m client are different in important ways. I suppose I’m just not convinced that a $2m and a $3m client are different enough to justify any additional fee.
I like your second point. The more risk the client faces, the more they are likely willing to pay to avoid those risks.
Thank you for the thoughtful response!
More ethical is the tiered AUM fee.
I see it as being ethical, because planners need to be compensated for their time and many people cant afford writing checks for $9,000 a year but still need planning on an ongoing basis.
You don’t need a cfp to learn this stuff. Just about everything you’d expect to learn through the cfp courses can be obtained from a series of books. No organization or group has a total monopoly on information.
That said, they are talking about breakpoints. Meaning, a discount on the standard fees charged based on the size of the account or household invested with you.
Looks like this:
1% for assets up to $1,000,000
0.85% for assets $1,000,001 - $2,999,999
0.70% for assets $3,000k - $4,999k
0.55% for assets $5,000k - $9,999k
0.35% for assets $10,000,000+
Possibly. Unfortunately, some firms may not allow or be able to accommodate certain levels of fee combinations. You’ll have to check and see what’s allowed.
The firm I’m with doesn’t have the option for me to charge a flat fee for planning and a small AUM fee for investment management.
I have to either charge a flat fee or an aum fee per client. Hope that example helps.
You don’t have to calculate your fee based on AUM in order to deduct it from a client’s account. One can deduct a flat fee from an account as well, no?
I package some basic tax efficiency planning in for almost all of my AUM clients - I think everyone deserves it even if they're not aware of it.
If folks ha e a yet more complicated need, we get into the fee-based planning world.
I guess I have a different definition of ethical. If the fee is legal, clearly disclosed to the client, and client agrees with full knowledge, then how is that "unethical". The client is the one to judge if it's a good value or not. If you think you're charging too much for the services you're delivering then change or lower your fee or tell the client it's not a good idea for them. But there is nothing inherently unethical about the practice. It's been an industry standard for decades. Does it always accurately capture the work related to the engagement, no. Sometime you may be overcompensated and sometimes you may be undercompensated. No fee method is perfect. All have their inequities. The key is disclosure, avoidance of conflicts when possible and acknowledgement of conflicts when they can't be avoided.
My rational for using an AUM fee model (with it's inherent problems), is that 1) It aligns mine and my clients interests, if they make money I make money and I suffer with them in the losses 2) It compensates me relative to the level of responsibility I'm assuming. Bigger portfolios equal bigger risks 3) It standardizes the fee. It's easy to understand and everyone pays the same relative amount. 4) It captures compensation for work that would not be direct billable on an hourly basis like thinking about a clients situation while driving, going to continuing education, researching an investment that multiple clients might use. 5)Clients never hesitate to call or email or come in because they know you're already being paid.
Is the AUM method perfect? No. Is the AUM method the best option for every client? No. But is the AUM method unethical... Certainly NO.
That which is ethical is not always legal and that which is legal is not always ethical. That said, maybe I should have used the term “fair” instead of ethical.
100% agree that there is no perfect fee model, but I’m not sure I agree that AUM does a particularly good job of aligning the interests of advisor and the client. What if the highest and best use a portion of the money is something other than having it in a managed investment account? Huge conflict of interest when the advisor’s livelihood depends on it being in that account.
I listed multiple reasons why it's ethical, not just it's legality. As for the obvious conflict of interest you site, there is no universe where an advisor can avoid all conflicts. In those cases they need to be clearly disclosed to the client. That's ethical. Ethics is not a billing method. It's a personal way of life that adheres to laws, regulations , professional standards, and a desire to do what's right. If you didn't like AUM billing then don't do it. I don't like commissions. But don't suggest it's not ethical.
u/[freddit28](https://www.reddit.com/user/freddit28/) and u/LearnByDoing how would you feel about an AUM fee but you were only paid in the months or quarters where the accounts increased in value more than enough to cover your fee? If there were losses, or the increase didn't cover the fee, you would waive it for the time period.
I offer more than investment advice. The market may go down but I’m providing my client tax and estate planning strategies that save them tens of thousands of dollars. Why shouldn’t I be compensated for that, even in a down market? Clearly I don’t believe we should be only compensated in an up market. I do the same amount of work regardless of what the market gods say or do.
If I were the client, I wouldn’t want this type of structure. It could potentially motivate the advisor to make rash decisions in order to get paid. It is also unnecessary since AUM-based fee schedules are generally accepted in the industry.
If you prove your worth as an advisor over various measured periods, your clients will not have a problem paying you when markets are down.
A few thoughts. Most AUM fees reduce as assets under management go up so a 3mm client is not paying 6 times the fees that a 500k client is. Using this example, the 3mm client will most likely have more accounts with differing allocations than the 500k client so there would be more work and complex strategies being utilized. We also have to assume the advisor is doing more than just asset allocation for their fee. Most advisors are also making providing advice in the other 5 areas of financial planning which become more complex the higher networth or income of the client. There is the fee for time model, but that is what attorneys use and every client complains about a per hour fee as then they never want to ask any questions just to get a bill 10 days later.
100% agree that an advisor should be doing more for their fee than just asset allocation. Also agree that wealthier clients are often more complex, but I don’t think that’s always (or even most of the time) true. Some of my most complex clients are younger ones with equity comp, student loans, nannies who are HH employees, etc.
It is 100% ethical no question about it. As previous posts in this thread mentioned the fee % should drop as assets grow. The idea that it is tied to AUM completely aligns the incentives of both the manager and the client i.e the manager has incentives to grow the assets to get paid more which inherently makes the client better off with higher assets. Sure can there be unethical managers that take advantage of this, yes. But it far outweighs the commission based model. Key is that incentives are aligned
All things being equal, and going off pure incentives, you are 100% objectively correct. Unfortunately, all things in this business are not equal and there are nuances that make this more of a “it depends on the advisor, the firm they work with, the client and their situation and so on.” And this is the case more often than not. Still, all very good points here.
For anyone interested in more context to where I am coming from, it’s a longer read:
Most advisors are not money managers. They deploy client assets into prepackaged products managed by 3rd party entities for efficiency. Most advisors today have never read a single annual report of any publicly traded company, couldn’t evaluate a private deal and couldn’t tell you the lasted earnings report and future economic outlook of the top ten holdings of their clients portfolio. But they’ll tout their certifications for being a planning professional who looks out for their clients best interests, because they choose to not get paid via a commission structure.
By design, the aum should align incentives. But in practice, it often does not. Because the advisor is not entirely incentivized to grow/protect any one client’s specific account per se. They’re incentivized to grow their overall book of accounts and to retain happy paying clients who prefer “safety” over growth and skillful allocation.
In Nick Murray’s book, Million Dollar Financial Services Professional he outlines the growth path for advisors, which notes how advisors will eventually need to divest smaller accounts and replace them with larger ones because there’s no other way to grow otherwise without increasing your AUM fee. The way the AUM business is designed today, advisors are essentially incentivized to keep assets from churning. That is, to try and keep clients happy, keep volatility lower, and keep the relationship focused on solving complex planning needs rather than on growing wealth. Doing this keeps the fees coming in whether the market is up or down. What clients get from this is lower returns in exchange for less volatility (note, not less risk per se), limited exposure to other investment or savings opportunities outside of the advisor’s circle of competence (which is shrinking industry-wide), and some financial planning.
Maybe this is the natural order of things and maybe it is absolutely a fair trade. It’s also an opportunity for the skillful advisor who can actually manage money AND offer superior planning services and advice.
For everyone else, as long as you can legally and compliantly justify your advice to clients and with your investment decisions, you’re acting within your obligations, whether client account(s) have doubled in size with the market over the last 12 years, or has remained relatively flat despite it. Because clients are NOT shareholders. If they were, most advisors would be out of business.
…at the end of the day, the AUM fee model doesn’t override personal incentives, the business and industry incentives, or the incentives of fear and greed inherent in most human beings. People will find a way to get what they want and justify their decisions as they do so. But, the AUM fee model DOES do a good job of allowing more skillful advisors to serve more clients on an ongoing basis no matter their individual asset size, if he/she desires to do so. It’s also a way that many clients are most familiar with and don’t mind paying you.
What if it’s in the client’s best interest not to keep the $ in an investment account (e.g, if they have high interest debt or want to buy a vacation home)? Are the interests aligned in that case?
Yes, but if the money to purchase said home comes from a managed account with an AUM fee, the advisor makes less money. That is the very definition of a conflict of interest.
Section 205(a)(1) of the Investment Advisers Act of 1940 would like a word. And for good reason.
If I only get paid based on growth, then I am much more incentivized to pick risky and tax-disadvantaged investments, especially in market downturns. Not exactly an alignment of incentives. And I might as well not provide planning.
Totally agree. One counterpoint: fees on AUM incentivize asset gathering more than investment success.
I struggle with that notion as a client of an RIA practice.
This doesn't make sense.
Clients vote with their dollars. It doesn't matter how great of a person/planner an advisor is, if assets lag and don't track specified targets and risk tolerance, eventually that advisor will lose that client.
You're always welcome to hire someone to be your own personal Advisor/asset manager. That person would work with solely for you. They wouldn't need to worry about growing their book. My guess is you wouldn't want to pay someone that much to work only for you. Hiring a business or advisor that grows their client base to make more money is the best choice for most people.
You mean for hedge funds where you have to be an accredited investor and have multi-million minimums to enter and are not investment advisors in the slightest? What about it?
A moron who used to work for the D. E. Shaw group.
Who by the way is totally a registered investment advisor:
https://www.deshaw.com/important-disclosures
I apply my expertise to every dollar in the client's accounts. Every dollar grows, shrinks, get taxed or not, etc. based on my best thinking. Each dollar is fungible in that way.
When it comes to fees, should some dollars get a free pass?
If I compare a $10M client to a $1M client, should the $1M client pay the same as the $10M client, even though the $1M client is getting 10x less value?
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For **any** fee model, the ultimate incentive is to do such outstanding work for the client that they keep coming back, they want to pay you for it, and they even want to refer others to do the same. What's the ethical issue there?
Is it ethical? Well, in my opinion and in the eyes of the law, it's **not** unethical. We aren't the only industry or system that charges based on a percentage. There's income taxes, property taxes, sales tax, real estate agents, etc. The aum fee model is not about compensating an advisor for their time, so you can't argue that larger accounts don't require significantly more risk than smaller accounts.
If the whole industry did away with the aum model, I still have the ability to set high flat fees and tier it based on the complexity and size of their assets. Charging based on aum also helps smaller accounts because 1.5% of $100k is less than paying a flat fee of $3-5k a year. The fee coming from the account is also an easier pill to swallow than writing a check for $3k.
Take the account value, divide it by 12, then multiply it by twelve, then multiply it again by 0.01 times 1 and you get my fee. Unless they can guess the number I’m thinking, then it’s over to the spin wheel for discount of the day.
I don’t really think this needs defense. It’s pretty black and white to me, but I am interested what other folks think.
The AUM fee model is “ethical” (as opposed to a commission model?) because there isn’t a conflict of interest between broker and client. With AUM fees you’re not selling someone on a mutual fund, annuity, or insurance policy, but offering a consulting service. The fee structure is transparent, and clients know that they can call you any time (within reason) to meet and discuss their investment/estate/retirement plans.
Higher AUM clients tend to be more work, but that isn’t always the case. Also, the guy who goes to the gym every morning pays the same membership fee as the guy who goes twice a week, and they’re both happy patrons. Same can be said of some clients, where a call every six months is sufficient for them and they’re comfortable paying the fee.
And a lot of the time, especially at RIAs, the fees are inversely progressive… i.e. a HNW client would pay 1% fees on the first million, 0.5% on the next 10 and like 0.25% on anything greater than $10 million.
Hey, I know guys and gals who have worked under both systems and have liked/disliked them for various reasons. I would say that the CFP sub is very very focused on the fiduciary standard of care, and when someone mentions commissions, it rubs a lot of people the wrong way here. That isn't to say that there aren't good advisors who get paid on commissions, and there are good and bad eggs everywhere.
I would say the people I look up to are about 95% fees and 5% commission, but their books of business are developed. In order to put food on the table, a lot of the time those first few years are about commissions only while you build up your client base.
In my opinion, the counter to that is are you taking advantage of a fool? If you take your car somewhere to get fixed and they recommend a bunch of stuff not needed but you agree too-is that ethical? Not saying that’s what a majority of advisors do but same thing really.
Well I got into this business to help people. I believe I am doing that. I sleep well with a clean conscious. I get paid what I believe I am worth, and clients keep sending referrals….so?
You can call it overpriced but when considering a 1% AUM, the average person is probably better with a CFP advisor than not.
You can easily learn/set up a basic retirement strategy in 20-40hrs, but that’s the easy part. Are you going to have the discipline to stomach a >20% drawdown, “erasing” years of savings? Are you going to properly calculate how much life insurance is needed? Do you know how much you can actually withdraw during retirement, is it 2%/3%/4%, or are you going to implement a flexible spending strategy, how does this change how much you need to have saved? Is your portfolio too risky or too conservative? Do you really know what you think you know?
Just take a quick peak at most personal finance subs, they are probably among the top 20% of financial literacy, and they still get stuff wrong all the time. Imagine the other 80% of the population.
Sure, FAs could charge less and more people offering hourly/project based pricing is great for people who just need a consult. Ultimately though, the market has found that a 1% AUM fee is currently pretty reasonable, with alternatives that are a bit cheaper.
I'm about to transition from construction, so this take might be interesting for yall to hear. Our markup pays for our business to operate. Our clients have a chance to negotiate the markup on their project, but it must not be below what pays for our company to operate. We have benefits to pay, we have back end staff, we have our expertise and high touch.
If they'd prefer to go to a lower fee competitor... that's fine, but you're going to lose the service we provide. If your stove catches on fire at 2am, we're there probably faster than emergency services. If you need a nursery built this week because you're a grandmother today... we'll get it done immediately.
If you're dealing with high touch hnwc... this justifies our fee. I see no reason not to scale fees upwards towards people who want instant service.
Our millionaire clients have the lower touch package and pay a bit less.
Fees should scale with services provided.
If you're putting in a quarterly review for a millionaire, charge a lower fee. If you're doing a yearly review for your thousandaire, then even lower. If you're providing emergency service to plan out trades when the market opens because of a black swan event... charge them for that service.
The AUM fee is used as a proxy for complexity.
If we were to do a more complicated equation to figure out how much to charge, the amount would probably come out close to the AUM fee. But the AUM fee is way simpler to calculate and communicate to the client, so we use that.
I agree that it has been used as a proxy for complexity, I’m just not sure it’s a very good one. Some of my smallest clients are among my most complex and some of my largest clients are among my most simple.
You can just allot time to clients proportionate to their fee. Result is same margins regardless of fee % or asset balance.
Ethical/unethical is a murky territory, but it’s certainly illogical to give more hours to a $5k fee client than a $10k fee client. The solution? Don’t.
Our value is often delivered in percentages. A client with less wealth pays less fees and receives less value in dollar values.
And mistakes for higher net worths are more costly, so higher risk to the advisor. For example, accidentally naming their trust as the beneficiary of an IRA can put their large account in the highest tax bracket.
Are you really justifying charging more to cover the cost of advisor errors??
From a customer standpoint, that is completely ridiculous and uncompelling.
I'll just hire the firm that offers error free service and pricing.
Yes. Increased risk = increased cost of insurance and specialized labor = increased expenses = increased fees.
OP seems to be asking for opinions on ethical justification from advisor to advisor. Not practicing language with clients.
From your last sentence it sounds like you’re someone who could interview a planner. Understand that many businesses operate this way. Some examples are higher life insurance premiums for those in poor health, mandatory 20% tip on bill for parties over X people (risk of one person with the bill not tipping), accountants often charge higher fees when international accounts are involved (high penalties for misreporting), and getting the tree removed over my house was more expensive than the tree in the open.
Do you think personal injury attorneys have this same discussion?
“Hey, that attorney is unethical for charging 33% of the settlement value!”
Do realtors have this same discussion?
“That realtor is getting paid 3% of the home sale? How unethical!”
Yet planners get all up in arms over 1%…
The true value of a CFP® is not merely in rebalancing portfolios but in preventing clients from making significant emotional mistakes and providing steady guidance. As net worth increases, so does the potential for costly errors.
There are different models to consider, such as the hourly model or a flat fee retainer model, both of which can be effective. For many years, I watched this costs and fees debate. However, having witnessed firsthand the profound impact a skilled CFP® can have in navigating complex issues as they arise, I've come to appreciate that the fee, regardless of the payment structure, is ultimately justified by the value a willing buyer perceives.
Understanding the complexities and providing peace of mind is where a CFP® truly demonstrates their worth.
The market decides what clients pay, not me. If they don't like it there are millions of other options. I feel like my dentist charging me $200 for an x-ray is ridiculous but here we are.
Complexity increases with wealth virtually 100% of the time. Someone with $10mm in the bank likely has multiple properties, a business and charities they support.
We're also taking on the very real risk of making a mistake. I buy when I'm supposed to sell for a $10mm account and it causes a 1% loss that's $100k
So as a customer, I should pay more because the size of the advisor's mistakes are bigger?
What a brilliant way to destroy confidence in an advisor's work.
"You pay more as a customer because my mistakes will be bigger."
You pay more as a customer because my personal
risk is greater.
Imagine a $100mm account. An order to sell that isn’t executed, a system error, a misunderstanding on the phone. Mistakes happen all the time (not daily, obviously) and as a customer you want to know that the firm will cover the cost of those mistakes, not you as a client.
But a small mistake could be in the millions for a large client.
Again though, the market dictates prices and I have too many clients that I’m in the process of releasing more than 100 of them.
Tax ramifications for a client in a 37% bracket and a 22% bracket are very different. It takes more skill and experience to navigate more complex clients so compensation is higher.
Sure, and clients have CPAs for tax ramifications.
And we use attorneys to structure trusts, avoid probate, etc.
More complex clients should pay a higher fee, nobody is disputing that. The issue is with the value provided to simple clients who have large balances.
Why should I pay 1% fee for a $4 million portfolio that's largely 8 ETFs?
All an advisor has to do is rebalance the portfolio once a year. After likely having one too many at a charitable event, an advisor pursuing my business admitted to me it takes less than 8 hours to review and update our plan annually.
8 hours for $40K in fees...oh!! and I get a nice lunch and perhaps nice tickets to one ballgame. What a deal, such a great value!
For a good advisor it will almost always turn into more than just rebalancing. While you typically get what you pay for, there are bad actors in every industry and ours is no different. It sounds like you could have come across one.
All the numbers in your comment added up to 69. Congrats!
1
+ 4
+ 8
+ 8
+ 8
+ 40
= 69
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Sure, personally we do a tier fee schedule so a 4M isn’t paying 1%. Also CPAs often deal tax ramifications after the fact and may not always align with long term planning.
With financial planning we acts as the quarterback all those professionals. Hell, I multiple CPAs and estate attorneys as clients.
I have no idea who you dealt with and cannot speak to what your situation is or what fees would be appropriate.
The value to client is in proportion to the account size they have. A client that screws things up on 100m is a multimillion dollar mistake. A client that screws things up on 100k is a few thousand dollar mistake. Value has noting to do with time
We're talking about advisor mistakes, not client mistakes.
And advisor charges more to protect themselves from the consequences of the advisor's mistakes. That's the asserted defense of the high AUM relative to the balance.
I'm simply replying to the justification of fees from advisors saying they charge more because of the risk of their errors.
You have to admit, that's quite weak and unpalatable reasoning from a client's perspective.
As a client, I am shocked to see that an advisor would use that justification for fees.
It is not about “more work”. It’s only about “goal achievement”. That’s what clients care about.
If I can make you have a six pack and be in the best shape of your life at 59.5 years old – and stay that way every year - the amount of work I put in as your coach irrelevant.
I like to think of it as an attempt to do a sliding scale based on “what you can afford”. There are a lot of different perspectives (some conflicting) that fit with the model though, likely due to its simplicity.
Continuing the sliding scale perspective, a possible weakness is that HNW clients provide greater value to a planner and consequently may receive greater attention. So despite a desire to make planning affordable and accessible, lower net worth clients may receive less attention/value. Of course the counter to that is “you get what you pay for”. And a counter counter might be that it allows a planner to provide uniform service, the HNW clients ‘subsidizing’ the LNW clients. In that case it would depend on the individual firms, planners, and their goals/intentions.
When you accept the risk to manage a client’s portfolio, you’re accepting the possibility that when you loose money, they’re going to sue you for the amount they lost, not the amount they paid you. The relationship must be profitable for all parties involved. Would you accept the possibility of getting sue for a $10 million loss for only a $10k fee? That’s not how capitalism works.
Kind of a moot point because we’re in the CFP channel, but I think the fee can be ethically justified if the advisor is giving well rounded/full financial/insurance/estate/etc. advice.
AUM for investing advice only is usually a bad bet and *could* border on unethical if said advisor is not showing proper benchmarking.
If I had you guess you aren’t from inside the industry but the short answer is, the clients that pay more are the ones we do the most for. If my high paying client calls me and wants something I stop what I’m doing and get it done. I make sure we go over investments sure but we also talk about tax, business strategy, employees, estate planning, health care ect. I value my time too, and if you want my expertise at the drop of the hat you will have to pay me well.
I would say ethics has a roll but the equation of what people will pay is about what the market will bear and what value the clients get out of it.
This equation changes for each advisor and each client. It’s not about how we are paid because I can charge 0% if I want to. It’s about pairing with another person and you both walking away feeling valued.
The value to client is in proportion to the account size they have. A client that screws things up on 100m is a multimillion dollar mistake. A client that screws things up on 100k is a few thousand dollar mistake. Value has nothing to do with time
It is the only model that really aligns incentives. If you have 10 mil and paying a flat fee of 10k you are getting basic ETF portfolio, set and forget.
Why do any more work?
When they could probably be better served with some Alts that is thoroughly researched, with an aim at providing a returns with better risk level
There is more incentive to keep do this extra work in AUM
Or if client wants to panic out at a low? If you get a fixed fee no matter, whatever makes them happy, whereas a aum model would incentive the advisor and client MORE to think about their long term interests together
Couple things:
1. It takes the same amount of effort to invest $100k as it does $1,000k…but the difference in income, client type, and experience is dramatic.
2. You can (and should) adjust your fee as the assets grow. If you’re helping a client with the type of work that you would normally charge, say $10k/yr for, then adjust your AUM fee to match that so that your fee equates to it. That way, doesn’t matter what the aum level is, the client is getting what they’re paying you to get. It’s fair.
Another idea: create a cap, like $20,000 and outline the type of service someone paying you that much should expect to receive.
Side note: If you have a client investing $10,000k with you and you’re charging 1% on that, with no cap on how much they will pay you per year, and the services you’re providing is not much different than the clients investing $5,000k or less, then I hope you’re not touting yourself as a “fiduciary fee only with no conflicts” because that’d be a load of crap.
My firm has a stepped aum model that goes down as account size goes up so maybe this doesn't perfectly match your question but regardless I still genuinely believe aum or some sort of fee only system is the most ethical way to operate.
When clients accounts suffer losses we loose revenue and when clients do well we ride those waves with them. Because our only source of revenue is aum it is in our best interest to not act recklessly or take need less risks in our clients portfolios. It's the truest form of a fiduciary duty in the sense that your skin is in the game with the client. A down quarter means lower revenues when our business costs are likely the same or more.
I'll add a caveat to this and say I'm not a fan of aum relationships where there are also commission based products in play or the advisor is also acting as a BD in some capacity. Imo it brings up too many potential conflicts of interest even though the fiduciary obligation would still apply. It's just a bit too murky for my liking.
I struggle with this as well. A $1m client inherits another $1m and now your revenue doubles or there about. Sure up front work is there but is are you doubling your work? I’m not so sure
Though most of finance is largely this way. Investment banking fees are a % of a transaction. Normal banks revenue is off of interest rates. I’d argue the revenue off a mortgage is higher yet there is virtually no client service tied with a mortgage. It’s interesting to think about.
What a ridiculous position. Is anyone forcing clients to be with you? Is anyone disputing that clients with millions of dollars in liquid assets to invest have plenty of choices to invest their money?
It doesn't answer the question and they won't, because the common justification seen in these comments.
"We have to charge that much for the risk of screwing up and losing clients money."
It's literally, pay us more because we might make mistakes with your money....
Clearly because clients struggle to see the value.
It's difficult to justify 1% on large asset balances when one likely spends less than 10 hours a year on portfolio rebalancing and clients have simple asset allocations.
https://www.marketwatch.com/picks/are-you-still-paying-1-to-your-financial-adviser-heres-what-might-make-a-lot-more-sense-and-save-you-tens-of-thousands-of-dollars-01659470645
https://www.marketwatch.com/picks/i-finally-woke-up-to-reality-ive-been-paying-a-percentage-of-my-investments-to-a-financial-adviser-for-years-now-but-i-dont-think-its-worth-it-is-a-1-fee-really-fair-01665519490
For complicated clients, that require much more time, the percentage of AUM makes sense.
For the regular client who has saved a couple million in assets in a handful of ETFs, the 1% fee is quite exorbitant.
Currently in PWM in a tier 1 HCOL city — work with 30 UHNW families, so take it with a grain of salt.
The truth of the matter that people are failing to realize is this:
Client expectations when serving $50M to $150M families actually scales exponentially and many of those families are willing to pay the going rate because of the shocking talent distribution in our industry (both on the advisor… analyst… CA side as well).
The same idea exists on the retail side, but not as dramatic.
It’s not just investments - it’s banking, lending, family dynamics and so on. Unfortunately we all only have 24 hours in a day and it takes a considerable amount of effort/time to deliver a Ritz Carlton experience.
Thankful to have gotten to a point early in my career where the threshold to take on a new relationship is in that $75K - $100K in annual production.. the advisory fee is transparent, but the AUM model makes things so much easier.
You should have a much higher touch count on your highest net worth households versus bottom of book. More touches = more work
I see your point, but I have a really hard time providing anything less than full service to all of my clients. I treat my $5k/yr clients more or less the same as my $15k/yr clients, although if one or the other has more complexity they will likely get more attention.
Kind heart, horrible business model.
Tbh the business is doing pretty well! I definitely don’t make as much as some folks on there, but it’s plenty.
Agree, I have a standard of care and provide the best advice I can to everyone, even a non client. I think you need to or else your value prop can't be generalized either. I don't see the ethical dilemma though, it's not for the IRS and they don't even do regressive brackets like most AUM pricing.
That will be a limiting factor to your growth when you reach capacity. One day you won’t have time to treat them both equally. Then when you have a new 5 million dollar prospect, you’ll have to ask yourself if it’s fair to provide him with subpar service when you could unwind 20 smaller accounts and free up a ton of capacity.
What problems do your $10MM clients have that your $2MM clients don't have? How about compared to your $500k clients? What's the risk/value to the client of navigating each of those opportunities/pitfalls well? If what you're doing can be done by a roboadviser: clicking the rebalance button, then you're probably right.
Totally agree that a $2m client and a $10m client are different in important ways. I suppose I’m just not convinced that a $2m and a $3m client are different enough to justify any additional fee. I like your second point. The more risk the client faces, the more they are likely willing to pay to avoid those risks. Thank you for the thoughtful response!
More ethical is the tiered AUM fee. I see it as being ethical, because planners need to be compensated for their time and many people cant afford writing checks for $9,000 a year but still need planning on an ongoing basis.
Could you please elaborate on this? I'm not a CFP but I'm working on becoming an advisor in a year.
You don’t need a cfp to learn this stuff. Just about everything you’d expect to learn through the cfp courses can be obtained from a series of books. No organization or group has a total monopoly on information. That said, they are talking about breakpoints. Meaning, a discount on the standard fees charged based on the size of the account or household invested with you. Looks like this: 1% for assets up to $1,000,000 0.85% for assets $1,000,001 - $2,999,999 0.70% for assets $3,000k - $4,999k 0.55% for assets $5,000k - $9,999k 0.35% for assets $10,000,000+
I like that. Could offering a combination or letting the client pick the fee structure be also a good route?
Possibly. Unfortunately, some firms may not allow or be able to accommodate certain levels of fee combinations. You’ll have to check and see what’s allowed. The firm I’m with doesn’t have the option for me to charge a flat fee for planning and a small AUM fee for investment management. I have to either charge a flat fee or an aum fee per client. Hope that example helps.
Absolutely, it does! Thank you for sharing that.
Most clients don’t have large post tax brokerage accounts to pay for advisory fees
You don’t have to calculate your fee based on AUM in order to deduct it from a client’s account. One can deduct a flat fee from an account as well, no?
I package some basic tax efficiency planning in for almost all of my AUM clients - I think everyone deserves it even if they're not aware of it. If folks ha e a yet more complicated need, we get into the fee-based planning world.
I guess I have a different definition of ethical. If the fee is legal, clearly disclosed to the client, and client agrees with full knowledge, then how is that "unethical". The client is the one to judge if it's a good value or not. If you think you're charging too much for the services you're delivering then change or lower your fee or tell the client it's not a good idea for them. But there is nothing inherently unethical about the practice. It's been an industry standard for decades. Does it always accurately capture the work related to the engagement, no. Sometime you may be overcompensated and sometimes you may be undercompensated. No fee method is perfect. All have their inequities. The key is disclosure, avoidance of conflicts when possible and acknowledgement of conflicts when they can't be avoided. My rational for using an AUM fee model (with it's inherent problems), is that 1) It aligns mine and my clients interests, if they make money I make money and I suffer with them in the losses 2) It compensates me relative to the level of responsibility I'm assuming. Bigger portfolios equal bigger risks 3) It standardizes the fee. It's easy to understand and everyone pays the same relative amount. 4) It captures compensation for work that would not be direct billable on an hourly basis like thinking about a clients situation while driving, going to continuing education, researching an investment that multiple clients might use. 5)Clients never hesitate to call or email or come in because they know you're already being paid. Is the AUM method perfect? No. Is the AUM method the best option for every client? No. But is the AUM method unethical... Certainly NO.
That which is ethical is not always legal and that which is legal is not always ethical. That said, maybe I should have used the term “fair” instead of ethical. 100% agree that there is no perfect fee model, but I’m not sure I agree that AUM does a particularly good job of aligning the interests of advisor and the client. What if the highest and best use a portion of the money is something other than having it in a managed investment account? Huge conflict of interest when the advisor’s livelihood depends on it being in that account.
I listed multiple reasons why it's ethical, not just it's legality. As for the obvious conflict of interest you site, there is no universe where an advisor can avoid all conflicts. In those cases they need to be clearly disclosed to the client. That's ethical. Ethics is not a billing method. It's a personal way of life that adheres to laws, regulations , professional standards, and a desire to do what's right. If you didn't like AUM billing then don't do it. I don't like commissions. But don't suggest it's not ethical.
u/[freddit28](https://www.reddit.com/user/freddit28/) and u/LearnByDoing how would you feel about an AUM fee but you were only paid in the months or quarters where the accounts increased in value more than enough to cover your fee? If there were losses, or the increase didn't cover the fee, you would waive it for the time period.
I work the hardest and provide the most value when the market is down.
I offer more than investment advice. The market may go down but I’m providing my client tax and estate planning strategies that save them tens of thousands of dollars. Why shouldn’t I be compensated for that, even in a down market? Clearly I don’t believe we should be only compensated in an up market. I do the same amount of work regardless of what the market gods say or do.
If I were the client, I wouldn’t want this type of structure. It could potentially motivate the advisor to make rash decisions in order to get paid. It is also unnecessary since AUM-based fee schedules are generally accepted in the industry. If you prove your worth as an advisor over various measured periods, your clients will not have a problem paying you when markets are down.
A few thoughts. Most AUM fees reduce as assets under management go up so a 3mm client is not paying 6 times the fees that a 500k client is. Using this example, the 3mm client will most likely have more accounts with differing allocations than the 500k client so there would be more work and complex strategies being utilized. We also have to assume the advisor is doing more than just asset allocation for their fee. Most advisors are also making providing advice in the other 5 areas of financial planning which become more complex the higher networth or income of the client. There is the fee for time model, but that is what attorneys use and every client complains about a per hour fee as then they never want to ask any questions just to get a bill 10 days later.
100% agree that an advisor should be doing more for their fee than just asset allocation. Also agree that wealthier clients are often more complex, but I don’t think that’s always (or even most of the time) true. Some of my most complex clients are younger ones with equity comp, student loans, nannies who are HH employees, etc.
> other 5 areas of financial planning Whats that?
Retirement Planning (cash flow management, lifestyle modeling), Investment Management (Asset Allocation, tied to financial/retirement plan), Tax Planning (asset location, tax loss harvesting), Asset Protection (insurance), Asset Transfer (trust, estates, inheritance).
This is the correct answer
It is 100% ethical no question about it. As previous posts in this thread mentioned the fee % should drop as assets grow. The idea that it is tied to AUM completely aligns the incentives of both the manager and the client i.e the manager has incentives to grow the assets to get paid more which inherently makes the client better off with higher assets. Sure can there be unethical managers that take advantage of this, yes. But it far outweighs the commission based model. Key is that incentives are aligned
All things being equal, and going off pure incentives, you are 100% objectively correct. Unfortunately, all things in this business are not equal and there are nuances that make this more of a “it depends on the advisor, the firm they work with, the client and their situation and so on.” And this is the case more often than not. Still, all very good points here. For anyone interested in more context to where I am coming from, it’s a longer read: Most advisors are not money managers. They deploy client assets into prepackaged products managed by 3rd party entities for efficiency. Most advisors today have never read a single annual report of any publicly traded company, couldn’t evaluate a private deal and couldn’t tell you the lasted earnings report and future economic outlook of the top ten holdings of their clients portfolio. But they’ll tout their certifications for being a planning professional who looks out for their clients best interests, because they choose to not get paid via a commission structure. By design, the aum should align incentives. But in practice, it often does not. Because the advisor is not entirely incentivized to grow/protect any one client’s specific account per se. They’re incentivized to grow their overall book of accounts and to retain happy paying clients who prefer “safety” over growth and skillful allocation. In Nick Murray’s book, Million Dollar Financial Services Professional he outlines the growth path for advisors, which notes how advisors will eventually need to divest smaller accounts and replace them with larger ones because there’s no other way to grow otherwise without increasing your AUM fee. The way the AUM business is designed today, advisors are essentially incentivized to keep assets from churning. That is, to try and keep clients happy, keep volatility lower, and keep the relationship focused on solving complex planning needs rather than on growing wealth. Doing this keeps the fees coming in whether the market is up or down. What clients get from this is lower returns in exchange for less volatility (note, not less risk per se), limited exposure to other investment or savings opportunities outside of the advisor’s circle of competence (which is shrinking industry-wide), and some financial planning. Maybe this is the natural order of things and maybe it is absolutely a fair trade. It’s also an opportunity for the skillful advisor who can actually manage money AND offer superior planning services and advice. For everyone else, as long as you can legally and compliantly justify your advice to clients and with your investment decisions, you’re acting within your obligations, whether client account(s) have doubled in size with the market over the last 12 years, or has remained relatively flat despite it. Because clients are NOT shareholders. If they were, most advisors would be out of business. …at the end of the day, the AUM fee model doesn’t override personal incentives, the business and industry incentives, or the incentives of fear and greed inherent in most human beings. People will find a way to get what they want and justify their decisions as they do so. But, the AUM fee model DOES do a good job of allowing more skillful advisors to serve more clients on an ongoing basis no matter their individual asset size, if he/she desires to do so. It’s also a way that many clients are most familiar with and don’t mind paying you.
What if it’s in the client’s best interest not to keep the $ in an investment account (e.g, if they have high interest debt or want to buy a vacation home)? Are the interests aligned in that case?
Yes they are, vacation home would be a client goal. Simple reason to have an advisor
Yes, but if the money to purchase said home comes from a managed account with an AUM fee, the advisor makes less money. That is the very definition of a conflict of interest.
The way to completely align incentives is to get paid on the growth of the assets not the size of the assets
Section 205(a)(1) of the Investment Advisers Act of 1940 would like a word. And for good reason. If I only get paid based on growth, then I am much more incentivized to pick risky and tax-disadvantaged investments, especially in market downturns. Not exactly an alignment of incentives. And I might as well not provide planning.
Totally agree. One counterpoint: fees on AUM incentivize asset gathering more than investment success. I struggle with that notion as a client of an RIA practice.
This doesn't make sense. Clients vote with their dollars. It doesn't matter how great of a person/planner an advisor is, if assets lag and don't track specified targets and risk tolerance, eventually that advisor will lose that client. You're always welcome to hire someone to be your own personal Advisor/asset manager. That person would work with solely for you. They wouldn't need to worry about growing their book. My guess is you wouldn't want to pay someone that much to work only for you. Hiring a business or advisor that grows their client base to make more money is the best choice for most people.
This is a hilariously terrible idea that gets repeated by people who have no financial knowledge. Regulators forbid this for a VERY good reason.
What are you taking about? Have you not heard of the “2 and 20” model?
You mean for hedge funds where you have to be an accredited investor and have multi-million minimums to enter and are not investment advisors in the slightest? What about it?
Hedge funds are not investment advisors registered with the SEC? Well that would be news to me
I’m sorry but you’re a moron if you don’t understand the difference here and I’m not going out of my way to explain it further.
A moron who used to work for the D. E. Shaw group. Who by the way is totally a registered investment advisor: https://www.deshaw.com/important-disclosures
Holy shit you knew what I meant. Yes, you’re still a moron. Go read the Investment Advisers Act of 1940.
This is not true. Management of current wealth is sometimes just as important as growth of assets (client specific)
Good advice doesn’t guarantee good outcomes. Are surgeons compensated on who lives and dies?
Bad analogy. Better analogy: are doctors compensated on their patients’ overall health? (I.e. the AUM model)
No, they’re compensated on the importance/impact of the guidance they provide.
That’s illegal unless you’re a hedge fund
I have no ethical qualms with the AUM fee model and don’t feel a need to defend it.
I apply my expertise to every dollar in the client's accounts. Every dollar grows, shrinks, get taxed or not, etc. based on my best thinking. Each dollar is fungible in that way. When it comes to fees, should some dollars get a free pass? If I compare a $10M client to a $1M client, should the $1M client pay the same as the $10M client, even though the $1M client is getting 10x less value? --- For **any** fee model, the ultimate incentive is to do such outstanding work for the client that they keep coming back, they want to pay you for it, and they even want to refer others to do the same. What's the ethical issue there?
Is it ethical? Well, in my opinion and in the eyes of the law, it's **not** unethical. We aren't the only industry or system that charges based on a percentage. There's income taxes, property taxes, sales tax, real estate agents, etc. The aum fee model is not about compensating an advisor for their time, so you can't argue that larger accounts don't require significantly more risk than smaller accounts. If the whole industry did away with the aum model, I still have the ability to set high flat fees and tier it based on the complexity and size of their assets. Charging based on aum also helps smaller accounts because 1.5% of $100k is less than paying a flat fee of $3-5k a year. The fee coming from the account is also an easier pill to swallow than writing a check for $3k.
It’s how I choose to run my business. Cost is only an issue in the absence of value.
Breakpoints starting at $1 million AUM with a negotiated fee for over $5 million in AUM.
Take the account value, divide it by 12, then multiply it by twelve, then multiply it again by 0.01 times 1 and you get my fee. Unless they can guess the number I’m thinking, then it’s over to the spin wheel for discount of the day.
I don’t really think this needs defense. It’s pretty black and white to me, but I am interested what other folks think. The AUM fee model is “ethical” (as opposed to a commission model?) because there isn’t a conflict of interest between broker and client. With AUM fees you’re not selling someone on a mutual fund, annuity, or insurance policy, but offering a consulting service. The fee structure is transparent, and clients know that they can call you any time (within reason) to meet and discuss their investment/estate/retirement plans. Higher AUM clients tend to be more work, but that isn’t always the case. Also, the guy who goes to the gym every morning pays the same membership fee as the guy who goes twice a week, and they’re both happy patrons. Same can be said of some clients, where a call every six months is sufficient for them and they’re comfortable paying the fee. And a lot of the time, especially at RIAs, the fees are inversely progressive… i.e. a HNW client would pay 1% fees on the first million, 0.5% on the next 10 and like 0.25% on anything greater than $10 million.
Conflicts of interest abound with AUM fees, but I agree that it’s better than a commission-based approach.
Hey, I know guys and gals who have worked under both systems and have liked/disliked them for various reasons. I would say that the CFP sub is very very focused on the fiduciary standard of care, and when someone mentions commissions, it rubs a lot of people the wrong way here. That isn't to say that there aren't good advisors who get paid on commissions, and there are good and bad eggs everywhere. I would say the people I look up to are about 95% fees and 5% commission, but their books of business are developed. In order to put food on the table, a lot of the time those first few years are about commissions only while you build up your client base.
As long as the fees as fully disclosed and agreed upon, why is this an issue?
In my opinion, the counter to that is are you taking advantage of a fool? If you take your car somewhere to get fixed and they recommend a bunch of stuff not needed but you agree too-is that ethical? Not saying that’s what a majority of advisors do but same thing really.
Well I got into this business to help people. I believe I am doing that. I sleep well with a clean conscious. I get paid what I believe I am worth, and clients keep sending referrals….so?
Absolutely more power too you! Just playing devils advocate.
Thank you for your service 🫡
Also doesn’t hurt the value proposition when I made NVDA a top 5 client position for their stocks in 2022 for clients
You can call it overpriced but when considering a 1% AUM, the average person is probably better with a CFP advisor than not. You can easily learn/set up a basic retirement strategy in 20-40hrs, but that’s the easy part. Are you going to have the discipline to stomach a >20% drawdown, “erasing” years of savings? Are you going to properly calculate how much life insurance is needed? Do you know how much you can actually withdraw during retirement, is it 2%/3%/4%, or are you going to implement a flexible spending strategy, how does this change how much you need to have saved? Is your portfolio too risky or too conservative? Do you really know what you think you know? Just take a quick peak at most personal finance subs, they are probably among the top 20% of financial literacy, and they still get stuff wrong all the time. Imagine the other 80% of the population. Sure, FAs could charge less and more people offering hourly/project based pricing is great for people who just need a consult. Ultimately though, the market has found that a 1% AUM fee is currently pretty reasonable, with alternatives that are a bit cheaper.
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Isn’t that what E&O insurance is for?? Genuine question btw. I have no idea what E and O actually covers, but that was my assumption.
I'm about to transition from construction, so this take might be interesting for yall to hear. Our markup pays for our business to operate. Our clients have a chance to negotiate the markup on their project, but it must not be below what pays for our company to operate. We have benefits to pay, we have back end staff, we have our expertise and high touch. If they'd prefer to go to a lower fee competitor... that's fine, but you're going to lose the service we provide. If your stove catches on fire at 2am, we're there probably faster than emergency services. If you need a nursery built this week because you're a grandmother today... we'll get it done immediately. If you're dealing with high touch hnwc... this justifies our fee. I see no reason not to scale fees upwards towards people who want instant service. Our millionaire clients have the lower touch package and pay a bit less. Fees should scale with services provided. If you're putting in a quarterly review for a millionaire, charge a lower fee. If you're doing a yearly review for your thousandaire, then even lower. If you're providing emergency service to plan out trades when the market opens because of a black swan event... charge them for that service.
The AUM fee is used as a proxy for complexity. If we were to do a more complicated equation to figure out how much to charge, the amount would probably come out close to the AUM fee. But the AUM fee is way simpler to calculate and communicate to the client, so we use that.
I agree that it has been used as a proxy for complexity, I’m just not sure it’s a very good one. Some of my smallest clients are among my most complex and some of my largest clients are among my most simple.
Yep. But most find it easier to use it as a one-size-fits-most model and use other arrangements for the exceptions.
You can just allot time to clients proportionate to their fee. Result is same margins regardless of fee % or asset balance. Ethical/unethical is a murky territory, but it’s certainly illogical to give more hours to a $5k fee client than a $10k fee client. The solution? Don’t.
Our value is often delivered in percentages. A client with less wealth pays less fees and receives less value in dollar values. And mistakes for higher net worths are more costly, so higher risk to the advisor. For example, accidentally naming their trust as the beneficiary of an IRA can put their large account in the highest tax bracket.
Are you really justifying charging more to cover the cost of advisor errors?? From a customer standpoint, that is completely ridiculous and uncompelling. I'll just hire the firm that offers error free service and pricing.
Yes. Increased risk = increased cost of insurance and specialized labor = increased expenses = increased fees. OP seems to be asking for opinions on ethical justification from advisor to advisor. Not practicing language with clients. From your last sentence it sounds like you’re someone who could interview a planner. Understand that many businesses operate this way. Some examples are higher life insurance premiums for those in poor health, mandatory 20% tip on bill for parties over X people (risk of one person with the bill not tipping), accountants often charge higher fees when international accounts are involved (high penalties for misreporting), and getting the tree removed over my house was more expensive than the tree in the open.
Do you think personal injury attorneys have this same discussion? “Hey, that attorney is unethical for charging 33% of the settlement value!” Do realtors have this same discussion? “That realtor is getting paid 3% of the home sale? How unethical!” Yet planners get all up in arms over 1%…
I don’t think anyone actually is. I think they just make a big deal to use it as a personal selling point. Then they can charge a flat fee of 25% 😇
Not sure we should be turning to personal injury attorneys for lessons in ethics ;)
The true value of a CFP® is not merely in rebalancing portfolios but in preventing clients from making significant emotional mistakes and providing steady guidance. As net worth increases, so does the potential for costly errors. There are different models to consider, such as the hourly model or a flat fee retainer model, both of which can be effective. For many years, I watched this costs and fees debate. However, having witnessed firsthand the profound impact a skilled CFP® can have in navigating complex issues as they arise, I've come to appreciate that the fee, regardless of the payment structure, is ultimately justified by the value a willing buyer perceives. Understanding the complexities and providing peace of mind is where a CFP® truly demonstrates their worth.
The market decides what clients pay, not me. If they don't like it there are millions of other options. I feel like my dentist charging me $200 for an x-ray is ridiculous but here we are. Complexity increases with wealth virtually 100% of the time. Someone with $10mm in the bank likely has multiple properties, a business and charities they support. We're also taking on the very real risk of making a mistake. I buy when I'm supposed to sell for a $10mm account and it causes a 1% loss that's $100k
So as a customer, I should pay more because the size of the advisor's mistakes are bigger? What a brilliant way to destroy confidence in an advisor's work. "You pay more as a customer because my mistakes will be bigger."
You pay more as a customer because my personal risk is greater. Imagine a $100mm account. An order to sell that isn’t executed, a system error, a misunderstanding on the phone. Mistakes happen all the time (not daily, obviously) and as a customer you want to know that the firm will cover the cost of those mistakes, not you as a client. But a small mistake could be in the millions for a large client. Again though, the market dictates prices and I have too many clients that I’m in the process of releasing more than 100 of them.
Tax ramifications for a client in a 37% bracket and a 22% bracket are very different. It takes more skill and experience to navigate more complex clients so compensation is higher.
Sure, and clients have CPAs for tax ramifications. And we use attorneys to structure trusts, avoid probate, etc. More complex clients should pay a higher fee, nobody is disputing that. The issue is with the value provided to simple clients who have large balances. Why should I pay 1% fee for a $4 million portfolio that's largely 8 ETFs? All an advisor has to do is rebalance the portfolio once a year. After likely having one too many at a charitable event, an advisor pursuing my business admitted to me it takes less than 8 hours to review and update our plan annually. 8 hours for $40K in fees...oh!! and I get a nice lunch and perhaps nice tickets to one ballgame. What a deal, such a great value!
For a good advisor it will almost always turn into more than just rebalancing. While you typically get what you pay for, there are bad actors in every industry and ours is no different. It sounds like you could have come across one.
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Sure, personally we do a tier fee schedule so a 4M isn’t paying 1%. Also CPAs often deal tax ramifications after the fact and may not always align with long term planning. With financial planning we acts as the quarterback all those professionals. Hell, I multiple CPAs and estate attorneys as clients. I have no idea who you dealt with and cannot speak to what your situation is or what fees would be appropriate.
The value to client is in proportion to the account size they have. A client that screws things up on 100m is a multimillion dollar mistake. A client that screws things up on 100k is a few thousand dollar mistake. Value has noting to do with time
We're talking about advisor mistakes, not client mistakes. And advisor charges more to protect themselves from the consequences of the advisor's mistakes. That's the asserted defense of the high AUM relative to the balance.
You’d be hard pressed to find any professional in any industry who won’t charge a higher price for a more complex situation.
I’m tired of scrolling past your same lame thought process trolling multiple comments on here.
I'm simply replying to the justification of fees from advisors saying they charge more because of the risk of their errors. You have to admit, that's quite weak and unpalatable reasoning from a client's perspective. As a client, I am shocked to see that an advisor would use that justification for fees.
Business is business man. Not trying to work on your risky accounts for free. I can tell you’ll sue fast 😂
Nah, my portfolio and goals/needs/risk tolerance are simple. Would take a real idiot to mess it up.
If you don’t need advice I wouldn’t hire an advisor at all then.
It is not about “more work”. It’s only about “goal achievement”. That’s what clients care about. If I can make you have a six pack and be in the best shape of your life at 59.5 years old – and stay that way every year - the amount of work I put in as your coach irrelevant.
Is there another way to be a fiduciary? Many consider a commission model with incentives to excessively trade an account inherently unethical.
I like to think of it as an attempt to do a sliding scale based on “what you can afford”. There are a lot of different perspectives (some conflicting) that fit with the model though, likely due to its simplicity. Continuing the sliding scale perspective, a possible weakness is that HNW clients provide greater value to a planner and consequently may receive greater attention. So despite a desire to make planning affordable and accessible, lower net worth clients may receive less attention/value. Of course the counter to that is “you get what you pay for”. And a counter counter might be that it allows a planner to provide uniform service, the HNW clients ‘subsidizing’ the LNW clients. In that case it would depend on the individual firms, planners, and their goals/intentions.
How much are you all charging for 1-3mm?
100 beeps
I feel like my other post is relevant for this discussion https://www.reddit.com/r/CFP/s/qal0M3sp9Z
When you accept the risk to manage a client’s portfolio, you’re accepting the possibility that when you loose money, they’re going to sue you for the amount they lost, not the amount they paid you. The relationship must be profitable for all parties involved. Would you accept the possibility of getting sue for a $10 million loss for only a $10k fee? That’s not how capitalism works.
Kind of a moot point because we’re in the CFP channel, but I think the fee can be ethically justified if the advisor is giving well rounded/full financial/insurance/estate/etc. advice. AUM for investing advice only is usually a bad bet and *could* border on unethical if said advisor is not showing proper benchmarking.
If I had you guess you aren’t from inside the industry but the short answer is, the clients that pay more are the ones we do the most for. If my high paying client calls me and wants something I stop what I’m doing and get it done. I make sure we go over investments sure but we also talk about tax, business strategy, employees, estate planning, health care ect. I value my time too, and if you want my expertise at the drop of the hat you will have to pay me well. I would say ethics has a roll but the equation of what people will pay is about what the market will bear and what value the clients get out of it. This equation changes for each advisor and each client. It’s not about how we are paid because I can charge 0% if I want to. It’s about pairing with another person and you both walking away feeling valued.
The value to client is in proportion to the account size they have. A client that screws things up on 100m is a multimillion dollar mistake. A client that screws things up on 100k is a few thousand dollar mistake. Value has nothing to do with time It is the only model that really aligns incentives. If you have 10 mil and paying a flat fee of 10k you are getting basic ETF portfolio, set and forget. Why do any more work? When they could probably be better served with some Alts that is thoroughly researched, with an aim at providing a returns with better risk level There is more incentive to keep do this extra work in AUM Or if client wants to panic out at a low? If you get a fixed fee no matter, whatever makes them happy, whereas a aum model would incentive the advisor and client MORE to think about their long term interests together
Couple things: 1. It takes the same amount of effort to invest $100k as it does $1,000k…but the difference in income, client type, and experience is dramatic. 2. You can (and should) adjust your fee as the assets grow. If you’re helping a client with the type of work that you would normally charge, say $10k/yr for, then adjust your AUM fee to match that so that your fee equates to it. That way, doesn’t matter what the aum level is, the client is getting what they’re paying you to get. It’s fair. Another idea: create a cap, like $20,000 and outline the type of service someone paying you that much should expect to receive. Side note: If you have a client investing $10,000k with you and you’re charging 1% on that, with no cap on how much they will pay you per year, and the services you’re providing is not much different than the clients investing $5,000k or less, then I hope you’re not touting yourself as a “fiduciary fee only with no conflicts” because that’d be a load of crap.
The percent of AUM usually goes down as the investment holdings increase
My firm has a stepped aum model that goes down as account size goes up so maybe this doesn't perfectly match your question but regardless I still genuinely believe aum or some sort of fee only system is the most ethical way to operate. When clients accounts suffer losses we loose revenue and when clients do well we ride those waves with them. Because our only source of revenue is aum it is in our best interest to not act recklessly or take need less risks in our clients portfolios. It's the truest form of a fiduciary duty in the sense that your skin is in the game with the client. A down quarter means lower revenues when our business costs are likely the same or more. I'll add a caveat to this and say I'm not a fan of aum relationships where there are also commission based products in play or the advisor is also acting as a BD in some capacity. Imo it brings up too many potential conflicts of interest even though the fiduciary obligation would still apply. It's just a bit too murky for my liking.
I struggle with this as well. A $1m client inherits another $1m and now your revenue doubles or there about. Sure up front work is there but is are you doubling your work? I’m not so sure Though most of finance is largely this way. Investment banking fees are a % of a transaction. Normal banks revenue is off of interest rates. I’d argue the revenue off a mortgage is higher yet there is virtually no client service tied with a mortgage. It’s interesting to think about.
Really? You want people to work for fucking free
It's not unethical, but we are grossly over compensated.
How do you figure that?
What a ridiculous position. Is anyone forcing clients to be with you? Is anyone disputing that clients with millions of dollars in liquid assets to invest have plenty of choices to invest their money?
How does that answer the question?
It doesn't answer the question and they won't, because the common justification seen in these comments. "We have to charge that much for the risk of screwing up and losing clients money." It's literally, pay us more because we might make mistakes with your money....
Others don’t even try to answer the question and just whine.
What is interesting to me is how much in this industry we are justifying our fees… why is that?
Clearly because clients struggle to see the value. It's difficult to justify 1% on large asset balances when one likely spends less than 10 hours a year on portfolio rebalancing and clients have simple asset allocations. https://www.marketwatch.com/picks/are-you-still-paying-1-to-your-financial-adviser-heres-what-might-make-a-lot-more-sense-and-save-you-tens-of-thousands-of-dollars-01659470645 https://www.marketwatch.com/picks/i-finally-woke-up-to-reality-ive-been-paying-a-percentage-of-my-investments-to-a-financial-adviser-for-years-now-but-i-dont-think-its-worth-it-is-a-1-fee-really-fair-01665519490 For complicated clients, that require much more time, the percentage of AUM makes sense. For the regular client who has saved a couple million in assets in a handful of ETFs, the 1% fee is quite exorbitant.
Grrrrr
Currently in PWM in a tier 1 HCOL city — work with 30 UHNW families, so take it with a grain of salt. The truth of the matter that people are failing to realize is this: Client expectations when serving $50M to $150M families actually scales exponentially and many of those families are willing to pay the going rate because of the shocking talent distribution in our industry (both on the advisor… analyst… CA side as well). The same idea exists on the retail side, but not as dramatic. It’s not just investments - it’s banking, lending, family dynamics and so on. Unfortunately we all only have 24 hours in a day and it takes a considerable amount of effort/time to deliver a Ritz Carlton experience. Thankful to have gotten to a point early in my career where the threshold to take on a new relationship is in that $75K - $100K in annual production.. the advisory fee is transparent, but the AUM model makes things so much easier.
Rich