Is Your Billing Structure Creating Potential Conflicts?

Sunday, May 21, 2017 12:03
Is Your Billing Structure Creating Potential Conflicts?

Tags: Advisor businesses | compensation | fees

 Advisors typically bill based on Assets Under Management (AUM). In general, the larger the portfolio managed, the more fees are earned by the advisor. As an advisor myself, I will frequently tell potential clients that this fee structure puts us “on the same side of the fence” as the client – our only incentive is to grow their portfolio.


Yet, when we calculate fees this way, how do we advise our clients when they seek input on:


  • Making charitable donations?
  • Paying off their mortgage?
  • Buying a second home?
  • Taking expensive vacations
  • Gifting money to others?
  • Implementing a large Roth conversion even though it will result in paying significant taxes?

    This Website Is For Financial Professionals Only


Of course, we’d all like to think that we will give recommendations in the best interests of the clients. But, is there some reluctance at the thought of losing AUM?


When you think about it, you advise on much more than “just” the investments you are managing. You help your clients with all of their financial matters. You might provide advice on:


  • Refinancing a mortgage
  • Stock options
  • College Funding
  • Purchasing a vacation home
  • And more …


It might be time for a change in billing methods – to either household net worth or straight retainer. The potential for conflicts of interest is just one point in favor of a switch. Other reasons can include:


  • If we claim that our biggest value is planning, then why do we charge based on account values?
  • If there is a substantial drop in the market, does our workload decrease proportionately? (Most advisors will agree that our workload actually increases during bear markets.)    


No matter how you are currently charging for your services, now might be a good time to consider alternatives.

Comments (0)

Write comment

You must be logged in to post a comment. Please register if you do not have an account yet.