Fee only advisers v. Fee based advisers

I've been kicking the tyres today on some wealth management sites in the U.S. - to see if I can pick up on any new trends, etc.

One thing strikes me is that many advisers describe themselves as fee only but nonetheless charge an "asset under management" (AUM) fee, whereas other advisors only operate on the basis of receiving an explicit actual payment from clients.

It seems to me that (say for on-going service) where a client has money deducted from his/her bank account each month is the more transparent approach. I'd go even further and say that AUM fees are much closer to commission than fees in nature.

I'd be interested on what others think? I'd also be interested in finding out what proportion of advisers adopt the explicit fee payment model in Ireland.

You need to look at the whole picture over time. Does an AUM fee structure give a greater incentive the the fund managers to do a better job?

Leo said:

Does an AUM fee structure give a greater incentive the the fund managers to do a better job?

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Hi Leo,

Where a fund manager is given an incentive for out-performance, I would classify this as some sort of performance related fee. This is not the area that I'm trying to address.

What I'm getting at is, for example, an investment vehicle that has a basic management charge of 0.5% p.a. and on top of this charge, the adviser demands an additional charge, say an additional 0.5% p.a., thereby bringing the total management charge payable by the client to 1% p.a.
That is, the adviser is taking an annual share of the fund value rather than charging an explicit fee.

My point for debate is that I believe that paying an explicit fee for services - rather than having money deducted from one's fund - is a far more transparent way of operating and that the AUM approach is more akin to commission (rather than fee) payments.

These are generally long-term arrangements, often for life, sometimes they even on to the next generation. An explicit fee might be fine this year, but what about next? In 10 years time? 50 years? How would changes be negotiated and how much would all that cost? An AUM based fee is agreed up front for the duration, is clear to all parties and gives the manager a direct incentive to increase the holdings.

I doubt too many managers would be willing to base an incentive on out-performance of peers, the Dow or S&P maybe...