What other industry does this? Do I pay the dealership a % fee when buying a car? Do I pay a % of my income when buying a new iPhone?
It is abundantly clear that the only point of a % model is to conceal the true $ amount being paid. Why not just say "your fee this year will be $10,000"? What is the benefit of saying it's a %? It is only because the % hides the true cost. If you really think about it, there's no good reason for suggesting a price in % terms. It's ridiculous the finance industry has pulled the wool over people's eyes here. % of this house, % of those managed assets, % of this M&A deal. It's a way to charge eye-popping amounts without the customer doing the math every transaction (either upfront or every year). Wool. Over. Eyes.
Your example between % and $-based fees is contrived and it is clear that the actual evaluation you are doing is a $ comparison. So just do that one! Keep the %s out of it. Everything around the "% industry" is a way to hide the true costs from customers.
1) Most people just need to pay the equivalent of a mechanic fee here--both in year 1 and ongoing since their needs are simple. This doesn't apply to UHNW clients who need a more partnership model with equity incentives. A 1% compensation is an equity incentive and they are hiring the wealth manager to essentially run their wealth management firm as a CEO. I write about this here: https://separatingvaluefrombias.substack.com/p/10-the-value-of-partnership-vs-pay
2) However, as a business model/behavioral economics standpoint sending someone a bill makes it tougher for them to keep paying the bill. However, if they subtly deduct from the back-end (especially if the client isn't seeing it come out of their account) it makes it easier for the client to stay with the provider. This is why firms do this. The client sees an 8% return and says "Wow, my advisor did really good this year". They're not realizing that the market did 9% and the advisor deducted 1% for his or her fee.
3) It's not just about the fee. It's about the value they provide for the fee. In the article I state quite clearly that I wouldn't pick the cheapest one because the value proposition is garbage. The lowest cost option doesn't provide me any additional value that I couldn't do myself. Hence, I'm not willing to pay $10k for an oil change.
I'm extremely skeptical of the % fee model.
What other industry does this? Do I pay the dealership a % fee when buying a car? Do I pay a % of my income when buying a new iPhone?
It is abundantly clear that the only point of a % model is to conceal the true $ amount being paid. Why not just say "your fee this year will be $10,000"? What is the benefit of saying it's a %? It is only because the % hides the true cost. If you really think about it, there's no good reason for suggesting a price in % terms. It's ridiculous the finance industry has pulled the wool over people's eyes here. % of this house, % of those managed assets, % of this M&A deal. It's a way to charge eye-popping amounts without the customer doing the math every transaction (either upfront or every year). Wool. Over. Eyes.
Your example between % and $-based fees is contrived and it is clear that the actual evaluation you are doing is a $ comparison. So just do that one! Keep the %s out of it. Everything around the "% industry" is a way to hide the true costs from customers.
A couple points here:
1) Most people just need to pay the equivalent of a mechanic fee here--both in year 1 and ongoing since their needs are simple. This doesn't apply to UHNW clients who need a more partnership model with equity incentives. A 1% compensation is an equity incentive and they are hiring the wealth manager to essentially run their wealth management firm as a CEO. I write about this here: https://separatingvaluefrombias.substack.com/p/10-the-value-of-partnership-vs-pay
2) However, as a business model/behavioral economics standpoint sending someone a bill makes it tougher for them to keep paying the bill. However, if they subtly deduct from the back-end (especially if the client isn't seeing it come out of their account) it makes it easier for the client to stay with the provider. This is why firms do this. The client sees an 8% return and says "Wow, my advisor did really good this year". They're not realizing that the market did 9% and the advisor deducted 1% for his or her fee.
3) It's not just about the fee. It's about the value they provide for the fee. In the article I state quite clearly that I wouldn't pick the cheapest one because the value proposition is garbage. The lowest cost option doesn't provide me any additional value that I couldn't do myself. Hence, I'm not willing to pay $10k for an oil change.