‘1% fee model’ on the way out

The typical fee-based model may soon be a thing of the past – that’s even as thousands of Canadian advisors move to adopt it.

Recent conference of industry professionals suggests the typical fee-based model could be a thing of the past.

“Financial planning is ‘the free toaster’ of the industry,” Bob Veres, publisher of Inside Information told a packed house at the spring National Association of Personal Financial Advisors conference in San Diego. “Within the next five years I think you'll see advisors migrating to something else.”

The “something else” is predicted to be a variation on the flat-fee model where the advisor charges an hourly or annual fee no matter the assets under management or the growth in those assets. The 1 per-cent advisor is increasingly looking like they’re on the way out.

The Investment News did a study in 2014 that found 95 per cent of financial advisors in the U.S. set their fees based on assets under management. However, fee-only advisors are turning to alternative compensation models such as retainers to reduce the emphasis on performance and more on holistic planning.

A good example of the changing of the guard comes from RTD Financial Advisors in Philadelphia where its advisors use a retention-fee model that minimizes the conflicts that can exist in wealth management. Two examples of conflicts are clients looking to pay off mortgages or buying into a private business.

Under a traditional fee-based model the advisor is losing significant revenue if he or she supports either idea thereby creating the conflict of interest. Under the RTD model, the client pays a quarterly retainer based on net worth rather than assets under management.

Conflict gone.

“We just feel it makes zero sense to throw in your core competencies for something else that is pretty darn easy to get,” Roy Diliberto of RTD Financial Advisors. “You can get asset management service for a lot less than 1% at lots of other places.”