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July 25, 2018 at 10:22 AM
Oldies fans consider Connie Stevens’ “Sixteen Reasons (Why I Love You)” a classic. It started out as No. 89 on the Billboard Hot 100 on Feb. 1, 1960, and rose to No. 3 on May 9. Managed money and asset-based pricing has been adopted by almost every firm, but not by every advisor. Let’s look at “16 Reasons,” pro and con.
(Related: The 7 Deadly Sins of Fee-Based Advisors)
Let’s assume asset-based pricing includes managed money and fee-based accounts, with financial planning on the front end and the advisor providing advice. The pros are compelling:
1. Potential to reduce lawsuit risk: Imagine a world where every client went through a process. A financial plan yielded a combination of an investment objective, a risk tolerance level with a specific asset allocation. The advisor and client, working together, chose asset managers to fill each bucket. The advisor and client review performance at scheduled intervals.
Pro: The structured nature would be a lot easier to defend.
2. It’s the ultimate pay-as-you-go pricing model. Investors don’t like front-end sales charges or back-end loads. Although investing requires a long-term time horizon, with managed money, you are only paying for the time you actually use the service. If you stay in for three years, two months and one day and then leave, you only pay for that amount of time.
Pro: There are no upfront fees or surrender charges.
3. Advisors are paid for doing the right thing. Transactional business requires ringing the cash register. Trading can easily lead to overtrading. When you own good, well-managed investments, leaving them alone is often the best advice.
Pro: Advisors don’t need to be trading to make money.
4. Clients and advisors are on the same side of the table. A transactional relationship is often considered adversarial. Trading makes the advisor money. When using money managers, the advisor and client can decide together to keep the manager or change managers. Although taxes might be involved, the client isn’t incurring additional fees to make the change.
Pro: Both parties have the same objective.
5. Advisors earn more when clients make more. It’s a simple concept. If the client’s assets grow, the dollar amount of the fees collected increases.
Pro: Clients shouldn’t mind paying more if they earn the lion’s share of the growth.
6. Advice has a value. Using managed money means clients are paying for expertise. If the advisor is suggesting they rebalance or shift focus from domestic to international, asset-based pricing recognizes clients shouldn’t expect professional opinions to be free.
Pro: The advisor’s value is quantified.
7. No one is an expert on everything. You might know an industry backward and forward, but are you an expert on South American or Asian equities? Probably not. You and the client hire that expertise.
Pro: You can help the client can hire the specific expertise they need.
8. You can’t watch everything 24/7. You sleep. You take vacations. The news cycle is 24/7. Events happen in Asia. It’s old news when you wake up. Some money managers have resources on the ground in local markets.
Pro: You can’t watch everything. Get others to do the watching.
9. Emotion clouds investing. Volatility scares people. They don’t want to buy when prices are low. They think prices are going lower. Professional managers are emotionally detached. It’s not their money.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.