Advisers cling to asset-based pricing model

As fee pressure spreads, fans of asset-based pricing are digging in their heels

The fee pressure that has been sweeping across the financial services industry gets a little too close to home for some financial advisers when it comes to discussing how advisers charge their clients.

“The friction over fees is in the media and not in the real world,” Joshua Brown, chief executive of Ritholtz Wealth Management, said Tuesday at the Inside ETFs conference in Hollywood, Fla.

“Clients are trying to find someone they can trust who they like; they don’t question why their lawyer gets paid, or why their accountant gets paid,” Mr. Brown said during a conversation about asset-based advisory fee models.

The session, moderated by Nate Geraci, president of The ETF Store, delved into alternative fee models based on the premise that as investment management becomes more commoditized, financial advisers should distinguish their services from investment performance.

Nina O’Neal, partner and adviser at Archer Investment Management, which mostly charges an asset-based fee, said investment management is part of the holistic planning process.

“You have to do both well, investment management and all the planning things,” Ms. O’Neal said. “We talk about how their financial success is tied to our revenues. We have a vested interest in their performance.”

Commenting on the fact that 25% of her firm’s fees are in the form of commissions, Ms. O’Neal said, “Your behavior determines whether you’re a good adviser, not your compensation model.”

Casey Smith, owner and president of Wiser Wealth Management, justified his asset-based fee model by saying that is how his firm has always done it, but that there is no emphasis on investment performance when dealing with clients.

“We focus on the planning side and the assets take care of themselves,” he said.

Mr. Smith said, however, that his firm does not sell commission-based products to clients.

“I’m of the opinion that a product should never pay the adviser,” he said. “If I want to use an insurance product, we bring that person into the office and we sit beside the client to make that decision.”

When it comes to alternative fee models, Mr. Smith said he sees some potential in subscription models.

“I’m excited to see the subscription models offered by some firms,” he said. “There’s certainly a place for it.”

The panelists generally agreed that subscription models might be the only way for younger advisers to get started and make a living in the financial planning business.

But the one approach that struck a nerve with Mr. Brown is the hourly-fee model, which he described as the “worst model.”

“I hear about hourly fees from hippies in the industry,” he said. That’s the shortest way to have a relationship with a client. Being that granular with what you’re giving people is a big mistake. There’s room for new models, but let’s be careful with what we do to the client relationship by introducing new models where they’re not needed.”

Although Mr. Brown does not believe the asset-based fee structure needs to change, he acknowledged fee pressures and said advisers need to adjust to that by enhancing their services.

“You should feel pressure, because it keeps you sharp,” he said. “We’re doing tax preparation and insurance evaluations now. Ten years ago, we probably wouldn’t have to do that.”

And 10 years from now, what asset-based fee does Mr. Brown expect to be charging clients?

“Fifty basis points,” he said.