A fee is a fee is a fee...

Soon there will be survey results indicating whether or not investors prefer fees or commissions.

I hate these “Do you prefer being shot or hung?” surveys....

Behavioral economists tell us that the psychology of money is important. Their view is that billable fees will undoubtedly maximize the “pain of paying” and that an embedded commission is the way to go for asset management purposes.

To help illustrate the “pain of paying”, I recently read an article in which a well-known private money manager was complaining that he was having problems with his high net worth clients.

Evidently, these well-heeled clients were avoiding coming in for their portfolio reviews. Why would this be? Normally if you have the wealth to afford your own personal money manager, why would you avoid their services?

It seems to me the reason is actually very simple.

People generally despise fees. There are HST fees, fees and service fees for every little bank transaction. Fees even to receive a paper statement. Fees, fees and more fees on top of fees.

The world is awash in fees.

In this particular instance, the client was being charged an hourly fee for the money manager’s advisory services.

Many investor advocates and the press prefer the hourly billing method because they claim it is; "open, transparent and disclosed." This is true. I know this because when I receive my phone bill, the fees are generally open, transparent and disclosed. An hourly fee for advice (much like what a lawyer might charge you) I suppose, could certainly be an alternative to other types of adviser remuneration. However, from a psychology of money viewpoint, I see problems with bill-by-the-hour types of fee models.

Imagine having a portfolio review with your adviser in a taxi. You are paying for the taxi. When the adviser is going into a long discourse about modern portfolio theory and asset allocation, what are you going to be thinking about as you glance (every few seconds or so) at the taxi meter?

I think you know where I am going with this. The answer – you guessed it - is the “pain of paying”. And you are undoubtedly feeling more and more the “pain of paying” every time the meter ticks up by another dollar. At this point, you are probably not paying much attention to your adviser or the portfolio review and as the minutes go buy, you are squirming uncomfortably in your seat and when you can’t stand it anymore, you make some excuse that you have another engagement elsewhere to attend to. If this is a $10 million client and all you got is 0.50 billable hours, the adviser naturally, would have to dump the client for economic reasons. You just can’t afford to keep the client!

So much for openness, transparency and disclosure; rich or poor, people just don’t like fees.

The press and their anti-adviser brethren would clap their hands in glee. “Well, this is capitalism at its finest. The market will dictate pricing for you and sorry to say – you advisers will just have to adjust.”

Fair enough. We do live in a competitive marketplace and yes our “pricing” will adjust according to market forces.

Unfortunately, I think the press will be very wrong. I think pricing is going to be adjusted upwards if advisers are forced to go to fee-based structures by the regulators, press or investor advocates that despise commissions so much. Although my taxi story could be perceived by some as amusing (faintly perhaps), bottom line, hourly based billing fees are not going to work for the reasons given. But asset-based fees undoubtedly will.

Ironically, the press is cheering for fee-based fees and are turning thumbs down on commissions. So if the regulators outlaw commissions and replace them with higher fees, we advisers are all going to get a pay raise!

I still can’t figure out how this will be to the investor’s net economic benefit.

Can you?

This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.


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