The practice of basing a client’s fees solely on the assets under the management of their financial advisor instead of their overall net worth is currently being analyzed by the financial services industry in recent news. While some may argue that the use of fees based on assets under management protects clients from overpaying, clients of financial planners who base their fees on assets only should be concerned that their firm is making investment choices that improve their bottom line instead of their clients or simply missing other resources available that complete the big picture of a client’s financial position. Take for instance a client who needs to pay off debt using money from his investment account, his financial advisor may dissuade his client to do so as it would lower the assets under management and thus lower the advisor’s fee. Or say a client sells a piece of real estate that isn’t part of the asset portfolio currently being managed by the financial advisor, the advisor and the client are risking a missed opportunity to reroute those funds for further investment and protecting the client’s profits. Basing fees on managed assets alone undercuts the client-advisor relationship at every turn, after all, your financial advisor should be interested in capturing the whole potential of your financial future. WorthPointe safeguards their clients by offering fee-only services provided by a CERTIFIED FINANCIAL PLANNER™ professional who maintains a fiduciary duty to his or her clients regardless of the investment products sold or changes in their clients’ managed assets. As a fiduciary, our team upholds the client’s best interest at all times whether we are managing all or only part of our client’s portfolio, ensuring that our clients have peace of mind that their advisor is considering all avenues of financial growth. As we build our clients’ financial freedom, providing well-informed and consistent management is inherent in our services. Read more on the scrutiny of fees based on managed assets below:

By Alex Padalka

RIAs charging a fee based solely on a client’s assets under management are selling themselves short, Tom Nally, president of Charles Schwab & Co., Inc., tells InvestmentNews. Instead, Nally says, RIAs should be charging a percentage of clients’ net worth, the publication writes.

Collecting the typical 1% fee on assets under management doesn’t account for the myriad other areas of advice provided by RIAs, such as regarding taxes, mortgages, estates and small businesses, he tells InvestmentNews, likening the fee to getting a haircut but only paying for the shampoo. Instead, Nally suggests charging a nominal fee, around 20 basis points, on a customer’s net worth, according to the publication.

Furthermore, RIAs need to differentiate themselves better in an environment where automated advice has commoditized basic assessment of risk tolerance and portfolio allocation, according to InvestmentNews.

In addition, the Department of Labor’s April release of the fiduciary rule, which requires retirement brokers to put clients’ interests ahead of their own, has made it more difficult for RIAs to stand apart from their competition, Nally tells the publication. While the SEC already imposed the fiduciary standard on RIAs, that alone is no longer enough to set them apart from the rest of the brokerage industry as a result of the rule, which is due to go into effect next year, InvestmentNews writes.

The rule will also lead to further fee compression for RIAs due to increased compliance costs, according to the publication.

This post was originally published on Financial Advisor IQ.