Five More Reasons the Asset-Based Fee Model Won’t Survive
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In my article last week, I gave five reasons why the asset-based fee model is unlikely to survive. Here are five more:
- The conflicts are pervasive
An article posted on November 27, 2011 in Investment News by Bert Whitehead set forth additional conflicts of interest when fees are based on a percent of assets under management. These included:
- Advising whether to rollover a pension plan or leave it with a former employer;
- Advising about charitable contributions;
- Advising about gifts to children to avoid estate taxes;
- Advising about annuities, including charitable annuities;
- Advising about purchasing a larger home and investing generally in real estate.
- If the fee is different for managing stocks and bonds, the advisor’s self-interest may result in an over allocation to stocks.
In the first five examples, a conflict arises because the suggested action (e.g., a pension rollover) would decrease the AUM and the advisor’s fees.
Whitehead concludes: “If fee-only advisors want to hold themselves out as being the most ethical practitioners of their profession, they should commit themselves to adhering to the highest possible and least conflicted standard.”