Now, before you start warming up your computer to post another comment criticizing me for beating the flat-fee vs. AUM fee horse even further to death, let me point out that one of the two rather lengthy comments to my last blog on that subject (The Dead Horse Bounce. And Another Thing About Flat Fees…), came from Elliott Weir of III Financial (who two weeks ago posted a comment suggesting that I had, at that time, beaten the flat fee debate at least into unconsciousness), so I'm taking his more recent comment as an editorial "get out of jail free" card to continue the discussion. (Thanks, Elliott.)
I should also point out that the two new comments to last week's blog referenced above were both thoughtful and insightful, and consequently warrant repeating and further discussion. I'll start with Elliott Weir's comment because I was impressed and encouraged that he concluded his remarks with this statement: "Please accept that neither model has a monopoly on 'best for all clients,'" he wrote. "In some cases, AUM [fees] would likely be the way to go, but there is plenty of evidence that a fixed-fee model benefits many clients as well."
While that comment strikes me as a significant departure from the current flat-fee party line that "AUM fees are so riddled with conflicts as to be the spawn of the devil," Elliott does go on to make a few other comments that cry out for a response, to wit: "The article you cited about the Mercer report said nothing about firms moving from a fixed-fee back to an AUM model: am I missing something?"
The short answer is "no," Elliott did not miss anything: The Mercer report did not say anything about firms switching back to AUM fees. In fact, the authors gave no indication that they considered researching that phenomenon at all. That may not be all that surprising considering the report was largely a polemic about the evils of AUM fees. Instead, my basis for referring to "firms that have switched back to AUM fees over the years," comes from conversations dating back over 30 years with advisors who have done so, and from conversations with consultants to advisory firms who recounted the experiences of their clients. (Yes, Virginia, that does mean that there's nothing new about flat fees.)
Weir then went on to raise the issue of client account size vs. client account complexity, in reference to my comment: "I have never talked to an advisor who uses the same number of stocks/bonds/mutual funds/ETFs/separate accounts, in all of their model portfolios, regardless of size."
He responded: "For accounts that have $1 million to $2 million, yes, my models are the same and thus they require the same amount of work, reporting, etc. Now you have talked to one…"
I must apologize if I wasn't clear. When I referenced "portfolios, regardless of size," I was thinking of perhaps $5 million or $10 million portfolios compared to, say $500,000 portfolios—which typically would involve vastly different expertise and workloads. To my mind, $1 million to $2 million portfolios are essentially the same size, and I'd expect them to typically involve about the same level of attention.
Elliott then goes on to explain: "When the wealthier do have more complex situations, then a different service level is required. That doesn't require an additional pitch any more than your cell phone provider requires a chart of what each level gets and the client can choose."
I suspect that Elliott may have missed the point here, too, and again, it's probably my fault. As I understand it, the problems with flat fees don't arise on the initial client pitch: as Elliott points out, that's easy. But over time, assuming the advisor does her/his job and/or life's good to the client, their portfolio will grow, possibly substantially. Through sound investing and job raises, bonuses, stock options, inheritance, house sales, etc., an initial $1 million portfolio might grow to $5 million or even $10 million nest egg, along with all the additional services a larger portfolio entails.
