Making a case for asset-based fees

Advice provided under an asset-based compensation model doesn’t have to be conflicted

Making a case for asset-based fees
Getting compensated based on a client’s asset levels could cause a conflict of interest. But the model is still favoured by investors even as lower-cost robo-advisors challenge traditional financial advisory firms.

Contributing to Advisor Perspectives, financial advisor John R. Robinson pointed out that alternative fee models also present potential conflicts of interest, according to Financial Advisor IQ.

The owner of US-based firm Financial Planning Hawaii, Robinson noted that billing by the hour could incentivize advisors to work slower. It also presents a dilemma in “value billing” — determining whether the per-hour rate charged to clients for a task should stay the same, even after the work becomes easier or faster due to automation.

Flat-fee advisors, on the other hand, would be tempted to do as little work as possible. Such advisors would therefore not be inclined to attend to more time-consuming aspects of financial planning.

The assets-under-management fee model may discourage advisors from giving advice that would shrink a client’s AUM, such as for a down payment or a real-estate investment. However, Robinson wrote, investors like the fact that advisors are paid more when their portfolio value goes up. Fees based on assets under management can be tax-deductible, unlike financial planning fees.

Finally, investors still put a premium on the ability to converse with an actual human advisor, which offsets the allure of lower costs presented by robo-advisors. Flesh-and-blood advisors, according to Robinson, are more likely to dive into financial planning aspects aside from investment when they’re working on an asset-based business model rather than as staff members on a hybrid platform.

The asset-based fee model could also be modified into a tiered structure, wherein varying percentages are charged based on the asset amounts managed. This would advisors to accommodate clients aside from ultra-high-net-worth investors.

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