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Clients lie to their assets under management (AUM)-based advisors. Those advisors know they are lying, and are dis-incented from acting as fiduciaries.

This conflict became a central issue in June 2017 when the Department of Labor ruled that charging clients based on AUM did not meet fiduciary standards if different rates were charged on different asset classes. Fee-only advisors were stunned.

But it is difficult to imagine charging otherwise. For example, although an advisor may be charging 1.5% of AUM, which is reasonable for stocks, no clients in their right mind would pay 1.5% on cash and bonds that are earning less than 0.3%.

The Investment Act of 1940 specifically permits advisors to charge fees as a percent of assets. This act was intended for managers of mutual funds. It was not intended for advisors serving the general public, because of the conflicts of interests that arise when providing personal financial planning services. One such conflict is the need to charge variably based on asset classes.

A few years ago I encountered this conflict dramatically when a new client, who had been working for a Raymond James stockbroker, who called himself a fee-only fiduciary, hired us. My client had about $2 million under management. In transferring the assets I noted that 97% were in stocks. Since the client was 67 years old and planning to retire in two years, this was too heavily weighted in equities. As I knew the broker involved personally, I talked to him and asked how he came up with the asset allocation of 97% stock, 3% cash, and the broker replied, “Well, how do I know how his other money is invested?”

The broker was clearly incented to allocate heavily to equities, because that would maximize his income.