Broadly speaking there are two ways for clients to pay for financial services. The first is generally used by wealth management firms like banks, insurance companies, pension plans and asset management companies. Traditionally these professionals will charge a percentage fee based on the client’s assets under management (AUM).
The second is on a “fee for service” basis typically used by financial planners, tax preparation and accounting firms, lawyers and other related professionals. We’ll discuss in more detail below.
Fee for Advice
The “Fee for Advice” business model is now the industry standard with bank based advisory firms as well as a growing number of independent wealth management companies. Typically, a client will be charged a fee ranging from 1.00% to 1.50% by the advisor. It is possible to see this amount reduced as the size of the client’s account grows, but for accounts between $1.0 to $5.0 million dollars it is rare to see it fall much below 1.00% meaning the average client with $1.0 MM of investment assets will pay approximately $10,000 per year in fees.
It is important to keep in mind that this fee is ONLY the amount charged by the advisor and her firm. Any additional charges by outside investment managers such as mutual funds, separately managed accounts, and hedge funds are then added to the advisor fee. This amount is typically found in the “management expense ratio” (or MER) of the fund or investment vehicle.
Finally, while the advisor will typically not levy additional charges for any services she provides beyond investment selection and trading, that advice will typically be restricted to general financial advice. For example, most investment advisors will not talk about tax returns or planning.
Embedded Trailer Fees
We at CHF continue to manage our client’s assets based on a trailing fee. The advantage of this model is that it tends to charge lower fees to clients based on their asset allocation. In a traditional 50/50 fixed income and equity portfolio the client can expect to pay roughly 0.75 to 0.85% depending on the funds selected. For a $1.0 million portfolio this difference could be as high as $2,500 per year in fees!
Fee for Service
What sets CHF apart from our competition is that in addition to providing investment management services, we also offer a variety of advisory services for which we bill by the hour. We believe this method is better for our clients for several reasons.
First, it is much more transparent. Clients can pick and choose which, if any advisory services they want from CHF. They will then know how much they pay for tax preparation and planning, estate planning, financial advice and plans, and any other financial work beyond the construction and monitoring of their investment portfolios.
Second, we believe this system is fairer. For the banks and other fee for advice firms it is not uncommon for them to set asset minimums before someone can become a client. For example, below a certain threshold (typically $250,000 to $500,000) they will not accept a client since such accounts would not generate enough revenue to make them profitable. Instead they will refer these clients to a bank branch or to an online investment platform. By contrast, at CHF we expect to be helping our clients with a number of other aspects of their financial lives beyond just the management of their assets. And since we will be compensated for this work, we are able to build better and deeper relationships with our client families. Most importantly, we do not need to set an asset minimum for when someone could become our client.
Finally, each client only pays for the services they use. In a fee for advice model the cost remains the same year after year regardless of the amount of work being done, causing those with low financial advice needs to subsidize those with higher demands.
Everything we do at CHF is designed with our client’s best interests in mind. For this reason, we feel that our unique blended billing model sets the industry standard for fairness and transparency.