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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:

  1. 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.”