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March 28, 2014 at 07:06 AM
In his most recent blog for ThinkAdvisor, “Why AUM Fees Still Make (Im)Perfect Sense,” Bob Clark makes multiple arguments for why charging a fee for assets under management is optimal for advisors and their clients. James Osborne, a CFP and founder of Bason Asset Management in Lakewood, Colo., responded with a blog on his own site. With his permission, we’ve edited Mr. Osborne’s blog (slightly) and present it below.
Bob Clark 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.
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 addressed 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.
