The time is now to be more transparent about advisory fees

For financial advisers collecting fees pegged to the size of client portfolios, 2022 has become a unique live-fire exercise for all those pitches about sitting on the same side of the table as their clients.

While the equity markets have recovered slightly from the June lows, the broad market indexes are still down significantly from the peaks of late last year, and there’s no good reason to assume the worst is over.

We know most advisers are not positioning clients to be 100% exposed to the equity markets, but whatever the allocation, advisory fees based on assets under management are certainly taking the biggest hit in more than a decade.

When you add to that the impact of inflation at a 40-year high and sweeping pay increases for most working Americans, it presents an inopportune time to be charging asset-based fees.

“It’s the way it works; you participate in the gains as assets and fees grow, and you participate on the downside,” said Tim Holsworth, president of AHP Financial.

“I think this makes perfect sense if you truly want to be on the same side of the trade as your clients,” he added. “There should be incentive to do a good job, and keep accounts growing, and there should be consequences for accounts that go down in value.”

There you have it. Putting a positive spin on a macroeconomic-driven pay cut is really all advisers who charge AUM fees have right now.

“I don’t think anyone on Earth is shedding any tears because advisers’ incomes are down this year,” said Paul Schatz, president of Heritage Capital.

“Down markets are part of the business as is lower fee income,” he added. “When markets go up, up, up and advisers income does the same, it’s also part of the business and usually way ahead of inflation. I have always said that in runaway bull markets, I have less stress, more new unsolicited business coming and an easier workload with higher income. In bear markets, I work harder, have more stress, fight harder for new business, and make less money.”

Working harder for less money might not be the winningest marketing message, but it could open the door to a more candid discussion about fees at a time when advisers are experiencing the sting of being on the same side of the table as their clients.

Fees are a perennial hot topic across financial planning, where everybody seems to be claiming the least conflicted means of getting paid. Most folks don’t begrudge professionals doing the important work of financial advice for making a decent living, but why do advisory fees have to be so confusing and opaque?

Earlier this year I helped a friend sever ties with an adviser she had been working with for years when it became clear that she had no idea what she was being charged for portfolio management. Even after a 45-minute phone call with the adviser, neither of us could understand exactly how or how much she was being charged.

My friend would not fit most definitions of a sophisticated investor, but she does qualify as a wealthy high earner, which is probably why the fired adviser took it so hard.

I write and talk a lot about advisory fees -- too much, according to some of the feedback I get from advisers -- and I understand there are myriad ways to skin a cat, with apologies to cat lovers and cats.

I can also appreciate the appeal of asset-based fees that are quietly deducted from client accounts throughout the year, regardless of economic cycle or stock market direction.

Underscoring my aversion to generalizations, I know there are advisers out there presenting fees with super transparency. My favorites are those firms that post advisory fees clearly on their websites in plain English, complete with fee calculations against various portfolio sizes.

My least favorite are those advisers who can’t or won’t explain their fees in simple language.

If there was ever a good time to do that, it’s now.