Some wealth managers restructure fees
Dec 14th, 2006 | Filed under: Investment Management FeesBy: Charles Paikert, Investment News
Published: October 16, 2006
Investment News has run a couple of stories recently suggesting a new fee-model is on the horizon for the retail advisory and wealth management industries. The first, described here, appeared about a month ago. The second (next post) ran a couple of weeks later.
Said Investment News:
“The wealth management industry’s traditional fee structure faces increased pressure and criticism both internally and from wealthy clients.
“The most pressing concerns in the rarified circles of firms catering to high- and ultrahigh-net-worth clients are fee transparency and the sustainability of percentage of assets under management as the industry’s pre-eminent pricing model.
“Nearly half of investors with a net worth of at least $10 million said they found it difficult to compare fees of wealth management firms, according to a survey released last month by the New York-based Institute for Private Investors.”
This is a situation that demands an alpha-centric solution. According to Investment News, the wealth management industry is concerned about fee compression. This has them considering new fee regimes that are not based on AUM. Examples include fees based on client complexity, objectives, or even on time required to service the account.
Some in the industry are even suggesting performance fees. (gasp!)
“…some executives, including Rod Wood, executive vice president of Wilmington Trust Wealth Advisory Services in Delaware, even have suggested that wealth managers need to look into emulating the hedge fund model of charging a performance fee on top of a management fee.”
We at AllAboutAlpha would suggest that performance fees sometimes encourage excessive market bets (e.g. levered beta bets) due to the asymmetry of manager compensation. Charging a performance fee that is tied to alpha generation might be better. Obviously, this is easier said than done since a beta bet might actually look like alpha over a short time period. But it would allow a better apples to apples comparison of money managers.
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