One of the reasons that I’m not a big fan of social media discussions like those on Twitter is that they feel like “drive-by” thinking to me: First, someone posts one or two sentences about a complex topic (such as flat advisory fees) mostly with the intent of swaying others to recognize the righteousness of the writer’s point of view. Then, a few other folks post one-sentence comments that either agree with the original statement (which get “liked” and praised) or disagree—and are dismissed with hit-and-run comments that question the poster’s credibility. Maybe it’s my training in philosophy, but this doesn’t feel like real thinking to me: which involves considering new information and other points of view in order to make our own ideas better.
A good example of how a beneficial discussion can work to advance the discussion is the comment posted by Elliott Weir of III Financial about my last blog (April 16, Flat Fees or Fees on AUM, Take 4: The Sweet Smell of Success), which was the fourth installment in an ongoing discussion about the relative merits of flat fees vs. AUM fees). Elliot has posted insightful comments to each of my blogs on flat fees, but his latest posting is perhaps the most important comment that I’ve seen or heard from anyone on the subject, and has indeed broadened my thinking: “One additional downside to the AUM pricing model is that, if you focus on the retiree market as I do, tying yourself to account value while periodic withdrawals are taken almost guarantees a ‘reduction’ in fees over time. Am I adding less value because my clients are enjoying their money, possibly paying off a house or buying some guaranteed income?”
Folks have mentioned the conflict that arises in the AUM fee model when clients want to take money out of their investment portfolio to pay off their houses, but in today’s low interest rate environment (which is deductible), paying off the mortgage probably isn’t going to pencil for most people anyway. However, the issue raised by Mr. Weir of declining AUM fee income as more clients enter their depletion phase clearly warrants serious consideration.
Much has been written recently about the need for attracting younger clients to offset the economic effects of aging client bases—primarily lower fee incomes and firm valuations. Yet few observers stop ask how big a problem this really is. The best analysis I’ve seen on the subject recently comes from Michael Kitces in his March 27, 2014 ThinkAdvisor blog, Your Clients Are Getting Older. So What?