For people with basic needs paying a % of your assets as a fee has limited upside. But for UHNW clients, it can help create the foundation for tax-efficient generational wealth management
I think this is a better argument than most (the status quo is "that's how it is"), but I'm still unconvinced.
I think a % fee makes sense on "excess value", not on "total value", and when I see a % quoted on total value, I get a bit skeptical.
Are the CEOs paid their salaries on % of market cap? No, they are paid in stock grants which accrue from the _excess value_ derived during their tenure (stock appreciation). Though we may quibble over how much excess value there is (say CEO alpha vs. market beta), the idea is to attach onto excess value.
Similarly, if I hire a lawyer for a personal injury case but don't want to pay the lawyer upfront, then I may pay the lawyer a % of the case. That again is the % of the excess value - the value that would not have occurred otherwise.
I have more of an issue with a % of sale on a house. I should pay a % for you selling a $1M house for $1.2M, but not a $1M house for $1M. The latter just doesn't really make sense. I admit that calculating excess value can be tricky, but the idea that we should instead take a % of total value or a % of revenues is not actually a way to align incentives. It encourages churn and ignores what we really care about: a % on excess value (or profits). Nevertheless, it is a convenient way for the finance industry to get rich.
I'd argue that any stock grant is a % of market cap compensation as opposed to a delta between the value of the stock when the CEO started and when they are given the stock.
To your point, it would be more fair if it could be tied to the specific value that individual provided, but that can be difficult to quantify. As you allude to, the wealth manager can implement great financial planning strategies, but the market could crash. So the client wouldn't end up getting much value from those strategies.
I think this is a better argument than most (the status quo is "that's how it is"), but I'm still unconvinced.
I think a % fee makes sense on "excess value", not on "total value", and when I see a % quoted on total value, I get a bit skeptical.
Are the CEOs paid their salaries on % of market cap? No, they are paid in stock grants which accrue from the _excess value_ derived during their tenure (stock appreciation). Though we may quibble over how much excess value there is (say CEO alpha vs. market beta), the idea is to attach onto excess value.
Similarly, if I hire a lawyer for a personal injury case but don't want to pay the lawyer upfront, then I may pay the lawyer a % of the case. That again is the % of the excess value - the value that would not have occurred otherwise.
I have more of an issue with a % of sale on a house. I should pay a % for you selling a $1M house for $1.2M, but not a $1M house for $1M. The latter just doesn't really make sense. I admit that calculating excess value can be tricky, but the idea that we should instead take a % of total value or a % of revenues is not actually a way to align incentives. It encourages churn and ignores what we really care about: a % on excess value (or profits). Nevertheless, it is a convenient way for the finance industry to get rich.
I'd argue that any stock grant is a % of market cap compensation as opposed to a delta between the value of the stock when the CEO started and when they are given the stock.
To your point, it would be more fair if it could be tied to the specific value that individual provided, but that can be difficult to quantify. As you allude to, the wealth manager can implement great financial planning strategies, but the market could crash. So the client wouldn't end up getting much value from those strategies.