Financial Planning Association Magazine Asset Based Fees
James Gerrard CFP®
Financial Planner, PSK Financial Services (Licensee: Charter Financial Planning Limited)
The Australian Securities and Investments Commission is concerned that asset-based fees are a cause of conflict of interest in that there may be a bias towards recommending larger amounts of money to invest.
If a flat or hourly fee is charged for financial advice, would a consumer expect that the flat or hourly fee on a $5000 portfolio be the same as the flat or hourly fee on a $5,000,000 portfolio? Obviously the answer is no, due to the likelihood that the larger portfolio would be more complex and require a greater level of advice. So isn’t there also a conflict of interest in flat and hourly-based fees to invest more money to keep billable hours up or to justify the annual flat fee? If so, why should asset-based fees be outlawed if the other fee methods have the same potential for conflicts of interest?
In fact, conflicts of interest can occur in most professions, however the same level of scrutiny is not applied as with financial planning. Accountants have a vested interest in keeping their clients’ affairs complex, lawyers have a vested interest in keeping legal matters open and mortgage brokers have a vested interest writing bigger loan sizes. The solution is that each one of these professions have a code of conduct to minimise conflicts of interests. The FPA also has its own Code of Ethics with Principle One being to “place the client’s interests first”.
Consumers should be given the right to choose how they want to pay their financial planner. If a consumer has made a balanced assessment that their financial planner has a pecuniary interest in seeing the value of their investable assets grow through an asset-based fee, there is no reason why this arrangement should not be allowed by the government. There is an alignment, rather than a conflict of interest in choosing an asset-based fee financial planner.