RIAs at odds over fees for clients' cash balances

For many advisers, whether to charge on cash depends on how much time they spend managing those assets.

Feb 10, 2017 @ 1:22 pm

By Jeff Benjamin

With the stock market charging ahead to new highs, financial advisers are faced with the question of whether to move some of their clients' profits off the table by going into more cash or cash equivalents.

But doing so raises an even bigger question: Should they be charging advisory fees on idle, low-yielding cash balances? In other words, should they be charging fees for essentially doing nothing?

The answer isn't as simple as it might seem. In fact, it's layered with subtle complexities and even potential conflicts of interests, for which there are no standard rules of practice or guidelines, say experts.

“I don't have a hard rule on charging a fee for cash balances,” said David Mendels, director of planning at Creative Financial Concepts LLC. “I have a number of clients who, for one reason or another, have very significant cash or equivalent positions, and if they're doing it on their own, why should they pay me?”

“But I have other clients for whom the cash position is an integral part of what I'm doing for them, such as building laddered CDs,” he added.

Others advisers are more black-and-white on the matter.

“We don't believe in billing on cash assets because we aren't actively advising clients when to move in and out of the market,” said Peter Lazaroff, director of investment research at Plancorp. “Given how most investors aren't earning anything in a money market fund, billing on those assets would be guaranteeing a negative return.”

With interest rates hovering at historic lows since 2009, most advisory fees would certainly eclipse whatever could be earned in a safe cash account. And, once factored into the larger investment portfolio, the fees charged on the cash position would actually pull down a client's net return.

For most investors working with a financial adviser, cash allocations are not the main focus. That said, some advisers use the fact that they don't charge fees for cash management as a marketing tool.

For many advisers, whether to charge on cash depends on how much time they are spending managing those assets.

“Our current policy is not to charge a fee for cash, but that is being re-evaluated as we speak,” said James Guarino, partner at MFA-Moody Famiglietti Andronico LLP. “We used it as a courtesy to clients and kind of as a marketing incentive when we first started our practice,” he added. “But we realized we were spending more and more time being strategic with the cash.”

As an advisory firm that includes an accounting practice, Mr. Guarino said he came to realize the value being added through management of certain cash situations.

One recent example, involved a client who was facing a $1 million tax bill after the sale of a business. By postponing the tax payment, the client was able to earn eight-months' worth of interest on that $1 million owed to the Internal Revenue Service.

“Even though we generally maintain up to 2% of assets in cash, we have traditionally not charged an asset-based fee for cash balances,” Mr. Guarino said. “This has been a decade-long exercise for us.”

In some cases, the complexity of the portfolio management can trigger questions about how or if to charge for cash balances.

Robert Schmansky, president of Clear Financial Advisors, includes cash balances in his advisory fees, and he's not a fan of using no-fee cash management as a marketing gimmick.

He said the liquidity of zero-commission exchange-traded funds has dramatically reduced his need to hold more than about a half percentage-point worth of cash in a portfolio, and he estimates the annual fees applied for the cash on a $1 million portfolio at about $50.

“This is one of several issues that some use for self-promotion, but I think have little consequence in the real world,” Mr. Schmansky said.

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