Trust Is The Currency of The Personal Financial Planner; AUM (Assets under Mgmt Compensation) Devalues Trust

Trust Is The Currency of  The Personal Financial Planner;

AUM (Assets under Mgmt Compensation) Devalues Trust

Maslow famously stated, ‘if all you know is a hammer, everything looks like a nail’ and the client gets nailed (Schwartz) in personal financial planning compensation.

Behavior is a function of its consequences

Tenet of Behavior Modification

In the practice of personal financial planning, the compensation method of assets under management compensation (AUM) inherently relegates the other the other elements of personal financial planning  to second class citizen status even orphans as personal financial planning just becomes just a gateway asset gathering. Constructively, the asset manager is masquerading as a personal financial planner.

Asset protection (home, auto, blanket liability, income replacement due to disability long term care insurance), asset conservation aka estate planning (income replacement for spouse, asset disposition (giving to whom you want, what you want when you want), liquidity, estate conservation) get a wink and a nod. That said income conservation (taxes) – is a focus as the less taxes the ‘more’ assets for the asset under management compensated ‘personal’ financial planner to be remunerated from.

Furthermore, at is implicitly, assets under management, is a contraindication to personal financial planning – as it inherently seeks more – taking more risk – in the name of getting more relatively – often at the expense of making the goals with the lesser risk. Too often more, better, now becomes less, worse, later – and the goals are not met or deferred – as the result of a more-on orientation per compensation method and, therefore, managing assets instead managing goals.

Rather than being on the same side of the table as the client (mutuality of interest – the basis of trust for the client) – the trust currency is devalued by AUM compensation (regardless of the pitch ‘when you win, we win.” In AUM personal financial planning, the client is further conditioned to focus on external comparison (i.e. Dow Jones, S&P etc while maybe a wink and a nod to goals. As a result in down markets, in particular, clients forget comprehensive planning – let alone do we still have ‘enough’ relative to each goal – and concentrate on how their portfolios are doing relative to ‘the market.’ Note: complaining is not unusual.

External comparison becomes the natural perspective & filter of AUM compensation – rather than goals being the basis of comparison. Thus the planner inherently – consciously or subconsciously – focuses on managing assets rather than managing goals.

Side Bar: Trust Me

How do you say ‘f**k you’ in Yiddish?.....

Trust Me

(Trust Me: is also a ‘60’s date movie theatre game with a high school date beginning with arm around the shoulder moving towards …. while at each movement asking permission via the question ‘trust me?”)

          Assets under management compensated planners will counter: if you lose – we lose (lower fees). That is a point of comparative more or less as the scorecard becoming the focus rather than on track, not on track (to meeting the goal(s)) and or goal preserved or not. Further’more,’ getting more at the expense of higher unneeded risk – jeopardizes the goal for the upside of planner AUM compensation which may not have been necessary. Consciously or unconsciously, AUM can be contrary to: the essence of trust: mutuality of interest, being on the same side of the table, and objectivity – the currency of trust – the very essence of the concept of fiduciary. This does not mean an AUM compensated planner cannot be trusted & objective – but rather the AUM compensation method is not inherently congruent to trust and objectivity.

There is no compensation method without conflicts or bias – apologists would say. Granted – if anything:

·         hourly compensation can lead to clients’ not calling for fear the meter is always running – and to the detriment after the fact to their goals.

·         Transaction (commission or fee & commission so called planning) is often just a delivery system for sales.

·         A flat fee or bracket fee compensation method gives client’s the assurance – that the planner, whether in cash or securities or whatever gets the same compensation, and therefore not motivated to take more risk or to do more transactions than necessary – but it too is assurance of a planner not having bias.

One could argue the bracketed fee (between x and y – if fee – based to hours - goes over hours allotted, the planner received no additional compensation. However, if the hours expended are less than allotted, the planner benefits. One could argue that is in the planners best interest to under utilize his or her hours. But, if the bracketed fee is such that the client knows – the bracket would be reexamined next year – that minimizes but does not the problem in either over and under utilization.

To compare the inherent conflicts of flat fee, bracketed fee with AUM  to is analogous to going 60 in a 55 mile an hour zone (flat fee, bracketed fee) with the potential of going 120 mph (AUM or transaction based compensation) There is no equivalency. As Thomas Sowell once said, there are no solutions only tradeoffs.

Regardless, the days are coming to an end for AUM personal financial planning compensation due to compression of percentages charged by competition even robo advisors. Now on the horizon is even subscription personal financial planning.

A True Story

          Years ago (in the late ‘80s), a commission based planner asked my advice as to how to transition to fee only planning. And in particular, what to say to this commission based clients.

          I gave him to alternatives:

          1) – tell the clients 12 months from now – you will be fully compensated on a fee only basis – but they had a choice to continue paying by commissions or going to fee only now but in 12 months regardless you will be fee only charging a quarterly fee OR

          2) – tell them you are sorry that you have been shtupping them all these years– and do not wish to do that any long. So you are immediately going to fee only personal financial planning compensation hoping they will understand get on board. Offer a jar of Vaseline™ concurrent as an ‘I’m sorry’ – literally and metaphorically.  

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So, the challenge and choice for AUM compensation personal financial planners’ is whether they immediately lead the charge (and change of compensation charging from AUM) or be charged (with client retention loss) in effect becoming a rotary phone in the smartphone era.