Investors have a variety of options regarding fee structure. One of the most popular is the fee-based pricing model.
Investors in fee-based accounts pay a set percentage generally based on the size of the account. Fees can also be set by asset type, where portfolios comprised mostly of low turnover, fixed income investments are charged less than equitybased portfolios.
According to PriceMetrix, fee-based structures are the preferred method of investing for higher net worth clients and they are growing in popularity.
PriceMetrix conducted analysis on 2.3 million investors with a combined $850 billion in investment assets and found that from 2007 to 2010, fee-based account business increased by 24% while transactional assets declined by 1%. There are many reasons for the increase.
Fee-based accounts offer transparency. Everything is included in one inclusive fee, so there is no inherent conflict of interest, and investors don't worry that their advisor is recommending a specific product or action just to generate commission. Instead, the advisor is focused on achieving the client's longrange financial vision.
It is an important distinction. The fee will grow with an increase in assets under management and therefore the advisor has a vested interest in increasing the client's wealth through positive portfolio performance.
Just converting to a feebased account can generate a cost savings. Consider an investor with a $500,000 portfolio making 25 trades per year. If the average size of the trades was $15,000 with a 2% commission per trade, the fees would be $7,500 per year. If that investor was instead in a feebased account charging 1%, the fee reduction would be $2,500 per year.
There are potential tax benefits in fee-based accounts. While brokerage fees or commissions associated with the purchase or sale of a security have tax benefits only in the year of sale, fees linked with feebased accounts are generally deductible every year.
For some people, feebased accounts aren't suitable. An elderly retiree whose $500,000 portfolio is comprised mostly of cash and fixed income is not likely suited to a fee-based account, and any advisor would be hard-pressed to justify charging $5,000 per year for managing such a low maintenance portfolio. It's more likely this person is better served by a traditional structure paying a fee per transaction.
Fee-based accounts are most suitable for an investor with complex financial needs. Beyond investment counsel and the execution of trades, this client needs the correlation of all aspects of a complicated financial picture. This might include research and guidance on other factors such as tax efficiencies, estate planning, education and retirement planning, insurance and implementation strategies.
However, no matter which fee structure is best for you, there must be tangible value in exchange for the fee and your advisor should be able to articulate that value.
Kim Inglis, CIM, PFP, FCSI, AIFP is an investment advisor and portfolio manager with Canaccord Wealth Management. The views in this column are solely those of the author.
