If your investment adviser hasn’t yet switched you over to a fee-based account, just wait. It’s almost certainly going to happen.
The latest PriceMetrix report on trends in investment advice fees shows that 52 per cent of adviser-client relationships included a fee-based account last year, up from 31 per cent in 2015. Advice firms love fee-based because it’s much more predictable and reliable as a revenue generator than charging clients commissions. In a fee-based account, clients pay roughly 1 per cent to nearly 2 per cent of their invested assets a year.
The problem with fee-based accounts was articulated by a reader who recently e-mailed to discuss the case of an acquaintance with a seven-figure account who pays a fee of 1 per cent. The account is about 40-per-cent allocated to fixed income and few trades are made. At issue is the value the acquaintance has been getting from the switch to fee-based from commission-based advice.
“When challenged [about fees], the adviser bafflegabs about the incremental services he provides for retirement planning etc.,” the reader said in his e-mail. “In truth, the value added is negligible.”
Fee-based accounts offer some benefits – transparency, comprehensiveness (they should include trading commissions) and freedom from advisory conflicts of interest. Because they get paid a straight fee, there’s no incentive for advisers to recommend investments paying the highest commissions. But if the adviser isn’t providing tangible value to the client, then fee-based advice can look like a cash grab.
This reader figures his friend would have to make 120 trades a year to generate commissions equal to the cost of fee-based advice.”This is extremely unlikely and would probably attract scrutiny for churning,” he wrote.
The adviser in this story appears to have switched to fee-based without any benefit to the client. Fee-based is a step up for advisers and their firms in terms of generating steady revenue. It should likewise be a step up for clients in the quality and quantity of advice and planning.