It’s easy to see why the financial advice business loves the fee-based compensation model so much.
Clients have issues, though. Some don’t like being harnessed into an arrangement where roughly 1 to 1.5 per cent of the value of their account is scooped up by their adviser and his or her company on an annualized basis. One reader got in touch recently after being staggered by the dollar amount of the fees she paid her adviser - about $13,500 last year.
Another reader took issue recently with the math of fee-based advice - why would the same 1 per cent fee apply on $1-million in assets, and $2-million? He found it difficult to understand how an adviser could provide double the value on the $2-million portfolio.
Jason Pereira, partner and senior financial planner at Woodgate Financial, said there may or may not be value in the fees applied to big accounts. “Wealth is often a proxy for complexity,” he said by e-mail.
For example, a 1 per cent fee applied on a $2-million account could be a fair value for a blended family with corporate and real estate assets, and large estate liabilities. “For a retired couple with $2 million, yeah, there is likely little additional value,” he wrote.
The reader who wondered about the value of paying the same fee for $2-million account as one worth $1-million also sought some guidance on the availability of flat-fee advice. A growing number of financial planners charge a flat or hourly fee for their services, but this arrangement is rare for advice services that focus on portfolio management.
A thought for clients who feel the fees they’re paying reflect the size of their account more than the services they receive: Ask for more service. For investments-only relationships, ask for financial planning that includes taxes and estates.
It may be possible to negotiate on fees, but don’t expect much. The woman who paid $13,500 in fees last year said she asked for a reduction and was told she could take her business elsewhere if she was unhappy.
Fee-based advice is supposed to align the interests of clients and advisers. Advisers generate more fee revenue when a client’s portfolio grows, and less if it shrinks. But fee-based accounts also create expectations for clients that service levels match the amount they pay.
It’s clear from those reader questions that there are sometimes mismatches between fees and the actual client experience.
-- Rob Carrick, personal finance columnist
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Compiled by Globe Investor Staff