The ‘best’ way to pay for advice

In describing their value and expertise, financial advisers often compare themselves to accountants and attorneys. But the way advisers are paid for their services usually is very different from how those other professionals are compensated.

Notably, financial clients rarely expect to receive a bill for meeting with their adviser. Instead, commissions, fees for managing assets and flat fees are the norm, not hourly rates — a pattern resulting from regulation, custom and client preference. Is there a “best” compensation arrangement that most closely adheres to a fiduciary standard?

Three registered investment advisers debated that issue in a panel discussion at a recent Institute for the Fiduciary Standard event. As reported by technology editor Ryan W. Neal, the advisers explained why their particular model — one an AUM fee for clients who want investment management, plus flat fees for those who want financial advice only; one a flat fee; and one based on an hourly fee — best suits clients.

The advisers explained how their fee structure addresses potential conflicts. Hourly fees, for example, may be in the best interest of clients who don’t want a long-term relationship, just help with a particular problem. An AUM approach may be best for those wanting long-term advice and expert advice on complex investments. On the other hand, it may not be best for those who need and want more help with financial planning than with asset management.

CUSTOMER DEMAND

Clearly, the need to meet customer demand is driving advisers to choose a preferred compensation approach. But let’s not forget regulation, which has been setting the ground rules for advice and compensation since the 1930s and 1940s. Regulation Best Interest is but the latest attempt to get “best” right, especially as that applies to mitigating conflicts surrounding advice. Many believe there is still more to be done.

But rather than go down the seemingly bottomless rabbit hole of seeking out the “best,” whether in conflict elimination or compensation, maybe it’s time to concede that conflicts will always exist and that no one compensation approach is always “best.” What’s more, any of several approaches may be optimal in a particular situation if an adviser is completely forthcoming and transparent with clients about why a particular type of compensation is being used, how rks and how much the adviser is making. Disclosure of all that should be short and in plain English, not 30 pages of incomprehensible boilerplate that no one reads or understands because it’s written by lawyers to cover everyone’s hindquarters, not to communicate.

With inflation raging, a recession on the horizon and markets skittish, to say the least, investors need trustworthy advisers more than ever. An adviser who’s honest and transparent about compensation, regardless of the model, and who truly puts the client first beyond the requirements of regulation is bound to engender the trust that advice seekers want most of all.