Do you, as an adviser, bill your clients in advance or arrears for portfolio investment management? This question sparked a lively argument among some advisers recently as, apparently, the answer to the question is not cut and dried. What is your approach?
Several years ago, Paladin Investors published a survey that included this very question. The results were about 60% of advisers choosing to bill in advance versus 40% in arrears, including some advisers who used both approaches. A random sampling of public disclosures by RIAs supports those findings.
Some points in favor of advance billing include the fact that the adviser is not placed in the position of being a creditor to his or her client thereby. We know that advisers are not permitted to lend money to their clients under most circumstances; of course, billing in arrears is not a loan but some advisers apparently feel the creditor status may be problematic. Another point is best illustrated by the situation where a client terminates the advisory relationship and the adviser, billing in advance, provides a refund instead of being placed in a position of asking for fees when the client may have already moved the accounts which could occur if billing in arrears.
A well-stated argument in favor of billing in arrears comes from another adviser’s disclosure document: “We don’t like to pay for professional services in advance of receipt of the services and we assume you don’t either.” This approach is in keeping with the billing process in many businesses and seems logical as well.
Probably the best approach for billing is to choose one that suits both adviser and client and stick to it. I have seen the difficulty that results when an adviser changes from one approach to the other and it is not easy. Going from arrears to advance really annoys the client when they are double billed while going the other way makes it hard for the adviser budgeting for the business.