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Why Percentage Fees?

In the financial industry, as with many other businesses, how clients pay is constantly under discussion and often changing. In recent years, some advisers have touted their focus on having a fee based business as being superior to other forms of payment, particularly including commissions. Charging a fee based on assets under management is a very common practice and has the benefit of being relatively simple to implement and certainly free of the conflict of interest for advisers who make their money through commissions.
Interestingly, there are a few voices now questioning the percentage fee on the basis of how such a fee does not tie directly to the value of the services provided. Pure investment advice, without any added service, is becoming much less expensive and although percentage fees have come down in terms of the percentage charged, they remain well above the reasonable and actual cost of investment selection alone. This places advisers in the position of supporting their percentage fee on the value of other services they provide, with planning leading the way.
An accepted alternative to the percentage fee is the practice of charging hourly fees, flat fees or retainer fees – an approach akin to what many attorneys choose to employ. This approach ties the adviser’s fees more closely to the services rendered to the client. However, the downside to this approach is that it requires billing the client varying amounts at varying times, depending on the work done. Advisers much prefer the automatic transfer of fees on a periodic basis where fees are listed as a line item on the comprehensive report of account balances and performance. This approach does little to attract clients’ attention unlike an hourly billing statement which would require action on the part of the client to pay.
Bottom line: What is preferred by and arguably best for the adviser is not necessarily what is best for the client and who knows what the regulators will eventually require or oppose.


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