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.
Pro: Money managers can make timely decisions in discretionary accounts.
10. Transparent Pricing. Basically, you know what you are paying. There aren’t hidden management fees or deferred sales charges in the small print.
Pro: Putting fees in plain view is one of the advertised benefits of asset-based pricing.
11. Smooths the advisor’s revenue stream. Transactional advisors have a problem: Clients might want to trade in up markets and sit tight in down markets. Fee-based pricing keeps revenue predictable.
Pro: Advisors aren’t getting desperate for business in slow times.
Why Asset-Based Pricing Is Not for Everyone
It’s tempting to try and convert your entire book. There are some exceptions
1. Some assets don’t belong. Your client buys bonds intending to hold them to maturity.
Con: What’s the rationale of paying a fee on assets that won’t be moving?
2. Easy to neglect clients. The advisor is being paid regardless of the amount of activity in the client’s account. It’s easy to forget about smaller accounts.
Con: Clients shouldn’t pay for advice they aren’t receiving.
3. Buy once, pay forever? There isn’t a compelling reason why the buy-and-hold client should pay a fee on assets for stocks they intend to hold long term. This also applies to clients who believe in their company and whose bonus includes unrestricted stock.
Con: Because of electronic record-keeping, holding individual stock certificates has gone out of favor. But why pay fees on an asset you intend to keep?
4. Self-directed investors. Financial advisors provide advice. You might not need much if you do your own research and make buy and sell decisions yourself. You might be better off trading with a discount broker online.
Con: Advice has a value, but you aren’t intending to use it. Why pay for something you don’t need?
5. It’s their hobby. They are day traders, in and out of the market several times a day. They have a system. They don’t consider this investing. They are using their play money. To them, it’s a financial casino. They don’t want advice. Your fee-based account structure probably has an upper limit on the number of trades clients are allowed to do in a specific time period.
Con: They don’t want advice. From the advisor’s point of view, there’s potential liability if they do themselves harm by getting in over their heads. Online trading is probably a better fit.
Although asset-based pricing is not for everyone, the pros should outweigh the cons in most situations.
— More by Bryce Sanders on ThinkAdvisor:
- Using Wine to Get Your Point Across to Wealthy Prospects
- How to Explain 6 Common Fees to Clients
- The Ten Commandments of Prospecting
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.