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July 16, 2014 at 05:34 AM
I recently had an email exchange with a long-time financial advisor that raised an interesting wrinkle to the fee discussion (see, for example, my previous posts Financial Planning or Asset Management? Clients Need Both, and Charging AUM Fees Does Not Conflict With Financial Planning.)
The new wrinkle in the discussion is this: how should advisors hande “legacy clients” when they convert their advisory business from commission compensation to fees? Here’s how this thoughtful advisor laid out the issues:
“I know of ‘advisors’ who have sold folks load products and move them to fees after a few years. Where are the ethics in moving them to a fee model when they’ve already paid the upfront load, and now have to pay an annual fee?
Every broker-dealer in America can produce a grid that shows how the advisor will benefit from conversion to a fee arrangement. It’s better for the broker-dealer, it’s better for the advisor. But it’s not better for the client who paid for a different arrangement years ago.
I still hold my Series 7 to take care of my legacy commission clients. And I often take over legacy accounts from clients when they hire me. Most of those takeover cases are commission-based products.”
Seems like legacy accounts are a case where the client-centered thing to do is to remain commission based. But I had to ask about the economics involved: “If you don’t convert legacy clients and legacy accounts over to annual fee payments,” I wrote back, “how do you get paid for your ongoing advice on those portfolios? Seems like great deal for the clients, but no so much for their advisor…”
Here’s his answer:
“If an older legacy client paid me through a front-end sales charge back in the day and I now get paid 25 basis points to handle questions, account needs, etc…., then I’m getting paid to handle those things. I got more upfront back in the day, and in exchange, I get less annually.
By the way, if one puts pencil to paper on that, that arrangement is clearly better for the long-term client. Could I make more money (and as the father of two daughters in college, this is pretty important)? If that was all I concentrated on, I probably could. But I was taught to believe that if I take care of the folks across the table, I will be taken care of as well.
They have a fancy word for that (Fiduciary), but I just call it doing the right thing every day.”
My initial reaction is that if all advisors were like this guy, we probably wouldn’t be discussing the fee/commission issue. Yet in the real world (Ever notice how something good rarely follows this statement? But I digress…), it seems as if we need a better process for protecting clients who want to convert to fee-paying accounts. I wonder if there couldn’t be simple formula that accounts for what the client has paid up front.
