Financial planners cutting or not charging certain fees could suffer unintended consequences
Caught up in a race to lower costs for clients, many advisory firms are cutting back or eliminating charges for certain services they offer. But is it possible for them to undermine their own value in the process?
This is the idea tackled by Preston McSwain, managing partner of US-based firm Fiduciary Wealth Partners, in a recent piece published on the CFA Institute’s blog site.
While clients should pay lower fees for investment products, according to McSwain, he suggested that it’s dangerous when other services such as unconflicted fiduciary advice, financial planning, and family wealth counselling are not priced right — assuming they have an associated price at all.
“Historically, many firms don’t charge their clients for trustee, fiduciary, or planning services,” he said. “Often these are bundled with investment management or simply thrown in as ‘value-added’ services.”
This business model, where investment management is the bread and butter and other services are included as freebies, leads to some trust and planning departments being regarded as “cost centres” within their organizations, which can “lose” money each year when analysed on a fully loaded basis as stand-alone divisions.
McSwain suggested that pricing trustee and planning services too low could send the wrong signal to clients; following a “you get what you pay for” mindset, clients might assume that charging low or no fees for such services means that they’re not worth that much. Firms that follow such pricing may also reinforce that mindset if they end up skimping on the investments necessary to maintain excellence in those aspects.
Any trustee model that depends on fees from proprietary investment management, shares fees with other investment product development and sales divisions, or receives fees from third-party managers has the potential for conflicts that go against clients’ best interests, McSwain said.
With that in mind, he proposed an alternative model that aligns the interests of the firm and the client: “A business that charges separately and appropriately for trustee, planning, and fiduciary services and does not rely on investment management fees or fee sharing to determine profitability.”
By focusing the client’s investment assets on simple low-fee funds like index funds, McSwain said, it’s possible to actually do better than going for active management. Such a move could also reduce the likelihood of client relationships being focused on products and shift it toward continuity in senior relationship management and services, improved transparency and security in reporting, and truly objective wealth and investment advice.
“If we focus on adding true, long-term, goal-oriented value in a fully transparent manner, we can create value for the industry and for investors,” he said.
For more of Wealth Professional's latest industry news, click here.
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This is the idea tackled by Preston McSwain, managing partner of US-based firm Fiduciary Wealth Partners, in a recent piece published on the CFA Institute’s blog site.
While clients should pay lower fees for investment products, according to McSwain, he suggested that it’s dangerous when other services such as unconflicted fiduciary advice, financial planning, and family wealth counselling are not priced right — assuming they have an associated price at all.
“Historically, many firms don’t charge their clients for trustee, fiduciary, or planning services,” he said. “Often these are bundled with investment management or simply thrown in as ‘value-added’ services.”
This business model, where investment management is the bread and butter and other services are included as freebies, leads to some trust and planning departments being regarded as “cost centres” within their organizations, which can “lose” money each year when analysed on a fully loaded basis as stand-alone divisions.
McSwain suggested that pricing trustee and planning services too low could send the wrong signal to clients; following a “you get what you pay for” mindset, clients might assume that charging low or no fees for such services means that they’re not worth that much. Firms that follow such pricing may also reinforce that mindset if they end up skimping on the investments necessary to maintain excellence in those aspects.
Any trustee model that depends on fees from proprietary investment management, shares fees with other investment product development and sales divisions, or receives fees from third-party managers has the potential for conflicts that go against clients’ best interests, McSwain said.
With that in mind, he proposed an alternative model that aligns the interests of the firm and the client: “A business that charges separately and appropriately for trustee, planning, and fiduciary services and does not rely on investment management fees or fee sharing to determine profitability.”
By focusing the client’s investment assets on simple low-fee funds like index funds, McSwain said, it’s possible to actually do better than going for active management. Such a move could also reduce the likelihood of client relationships being focused on products and shift it toward continuity in senior relationship management and services, improved transparency and security in reporting, and truly objective wealth and investment advice.
“If we focus on adding true, long-term, goal-oriented value in a fully transparent manner, we can create value for the industry and for investors,” he said.
For more of Wealth Professional's latest industry news, click here.
Related stories:
The debate over fees continues
What do Alberta’s retail investors really want?
