Five Reasons Your Asset-Based Fee Model Won’t Survive


The advisory business is changing rapidly. Your fees will be a subject of continuing scrutiny. Here are five reasons why the asset-based fee model won’t survive:

  1. It carries an undisclosed conflict of interest

In SEC v. Capital Gains Research Bureau, Inc., decided in 1963, the U.S. Supreme Court held that Congress, in enacting the Investment Advisers Act of 1940, intended “to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which was not disinterested.” It further held that investors “must . . . be permitted to evaluate overlapping motivations, through appropriate disclosure, in deciding whether an adviser is serving ‘two masters’ or only one, ‘especially . . . if one of the masters happens to be economic self-interest.”

Image source: The Blue Diamond Gallery
Asset-Based Fee Model

When an advisor provides financial planning and investment management advice, and calculates its fee on assets under management, it has an inherent conflict of interest. Its economic interest is served by increasing assets under management. Its financial planning advice is rife with issues where a recommendation would reduce assets under management. These issues include whether to pay off a mortgage, whether to purchase more life insurance and whether to purchase a deferred-income annuity (longevity insurance), among many others.

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As recently as February 26, 2015, in a speech to the IA Watch 17th Annual IA Compliance Conference, Julie M. Riewe, co-chief, asset management unit, division of enforcement of the SEC stated: “An adviser’s failure to disclose conflicts of interest to clients subjects it to possible enforcement action. Because disinterested investment advice – or, alternatively, clients’ knowledge of any conflicts that might render their adviser’s advice not disinterested – is at the heart of advisers’ fiduciary relationship with clients.”


I reached out to Knut A. Rostad, president of the Institute for the Fiduciary Standard. I asked him whether an advisory firm that provides both investment management and financial planning services, and charges a fee based on AUM, is required to disclose the potential conflict of interest. His response was an unequivocal “yes.”

Do you really want to continue with a fee model that requires you to make this disclosure?

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

By Dan Solin, read the full article here.


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