The Obstacles, and Solutions, to a Post-AUM Profession

Less than a month after I recommended that an organization – specifically NAPFA – set new membership standards regarding an RIA firm’s revenue model, one has risen to take up the challenge.

My article talked generally about the next evolutionary stage of the financial planning/investment advisory profession, and one area ripe for change is the most popular revenue model. I said that the switch from commissions to an assets-under-management (AUM) fee model was a long, hard, transition that might never have happened but for an association of brave volunteers who publicly gave up commissions. They formed NAPFA, and it waged a very successful campaign in the consumer press arguing that individual investors were better off working with an advisor who charged fees rather than getting paid by product companies to recommend their mutual funds, annuities and life insurance contracts.

I said the next evolutionary step is to replace the AUM revenue model with…

I’m not sure what.

It could be hourly, fixed monthly or quarterly fees, or some combination of these. Advisors could manage client assets as a convenience under these fee arrangements, perhaps adding some extra compensation for the extra work. There’s a great discussion of the various potential fee arrangements organized by business consultant Matthew Jackson that you can find here. To see a lot more go here.

There are several reasons why abandoning the AUM model would benefit the profession, but the most important is that it is much too easy for asset gatherers to continue their former sales activities after they switch from commissions to AUM. They just shift from selling annuities to selling the services of a TAMP (or in the case of wirehouse brokers, their firm’s investment platform). They can tell clients that they’re paid entirely by fees, and obscure the difference between salespeople and professional, fiduciary advisors.

But they could not so easily obscure the difference between asset-gathering and professional advice if the professionals were all paid some other way than AUM. That’s the main reason why I have periodically beaten what many readers consider to be a dead horse.