In my last blog, I promised that my next blog would be about how flat fees can work in tandem with AUM fees to create better advisory firms, but I’m afraid that will have to wait. One of the comments to my last blog (“Are Flat Fees Better for Clients—or for Advisors?”) simply cries out for a response.
It’s not clear to me why many proponents of transforming the independent advisory world into “flat fee only” often talk as if they are completely unaware of the many client benefits of an AUM fee model. Can it be that they are so caught up in the euphoria of “taking financial advice to its next level” that they’ve forgotten the myriad reasons independent advice evolved into AUM fees—and why that’s transforming the entire financial services industry as you read this?
The comment in question came from Derek Tinnin, who posted a lengthy response to my blog, including the following passage about one of the primary benefits of AUM fees that I had cited: “As for giving the advisor ‘an incentive to grow my portfolio,’ that’s just a flawed view of the advisor’s role, at least it is within the passive philosophy camp. That may be a correct way to view the role of active managers, but where’s the data to support the theory that they are capable of growing your portfolio in the first place? The idea that a percentage fee puts the adviser ‘on the same side of the table’ assumes that 1) they are the source of performance; and 2) it eliminates conflicts of interest. Both are false. Markets produce performance, not advisors […].”
My first response to Derek is my customary “really?” But I’ll refrain from that. Hopefully, you can already see why I find this reasoning misguided, but just in case, I’ll explain. In my view, there are three major benefits for someone engaging a professional (read: fiduciary) financial advisor:
1) Advisors protect clients from themselves. As virtually every financial advisor on the planet knows, if left to their own devices, most people would make one financial mistake after another, starting with failing to save enough or any at all, and including buying at the top of bull markets, selling at the bottom of market corrections, and investing in every “hot” stock or tax shelter they hear about from their golfing buddies or brothers-in-law. If all a financial advisor does is instill some rational discipline into a client’s financial actions, they will have earned whatever their fee was many times over.