Some countries are moving towards a fee-based compensation arrangement rather than commissions based in PWM. Obviously, there is an inherent conflict of interest when advisors are paid commission and trailer fees on the investment products they sell. With fee-based, you get more objectivity, transparency and professionalism. Countries like Britain, Australia and the Netherlands have already banned commissions, and Canada may follow next according to this article by Investment Executive.

With the abolishment of commissions, this type of arrangement can put an upper limit on earnings potential, which has induced many to leave the industry:

Indeed, in some countries, the ban on commissions has caused a substantial number of advisors to exit the business. Britain, for instance, has experienced an approximately 30% reduction in the number of financial advisors, due to the ban on commissions, along with new rules requiring advisors to attain higher educational qualifications. Another 20% to 30% are expected to leave the business by the end of the year.

However, there are some upsides:

He pointed out that in Australia, where new regulations banning commissions are set to take effect in July, roughly half of advisors have already moved to fee-based compensation models, and many are finding that their revenues have gone up as a result.

Perhaps because some advisors have left, leaving more clients for the rest who`s stayed or clients are more inclined to trust their advisors in a fee-based arrangement? I`m just speculating.

For advisors, I can imagine how fee-based would be beneficial to someone who is just starting out in PWM, and much more difficult for someone who is comfortable with commissions with their book of clients.

I`m not in PWM, but I was hoping if WSO can share their experience and opinion on this. Can it ever happen in the US? Is fee-based better if you are/were in PWM?

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*EDIT: I just realized how ridiculously long this is, but I think it should be a semi-decent read if you are interested in this stuff.

No problem... I used to work in PWM and find this topic somewhat interesting.

Another scenario regarding fee-based accounts is discretionary vs. non-discretionary accounts.

Standard, plain vanilla fee-based accounts are usually non-discretionary meaning even if you are the "hands-off" investor described in my first post, your Advisor still needs your permission to make any changes. In order to set up discretionary accounts, an Advisor must fulfill certain criteria in order to qualify as a "portfolio manager." The criteria is probably set by a combination of FINRA and firm-specific compliance policies that will require an Advisor who wants to start managing discretionary accounts to be in the industry X amount of years, take specific CE classes or self study tests, draft a written investment strategy/objective and submit models all to be kept on file, get clients written permission to turn on the "discretionary" switch, etc etc etc.

ANYWAY, getting back to the fee/commission topic... at my firm, a discretionary account charged the account fee against the total account value (i.e. every single penny held in a specific account, including any cash). The idea behind this is that if you are acting as a "portfolio manager" and a portion of the account is sitting in cash, you view that as an asset class and a strategic position. However, it could be that the client regularly draws money out of the account or prefers to have a small cushion, but it is still incorporated in the fee calculation and lot of a clients are not aware of this, so in essence they would be receiving a very substantial negative return on the cash after fees hit the account and then factoring in inflation. Also, "transaction based" investments such as individual stocks are no longer commissioned but now incorporated in the fee calculation, so even if a stock just sits in the account for a year or two it will still be incorporated in the overall fee calculation. This platform is attractive to Advisors who have a lot of hands-off clients b/c there is more flexibility, block trading, managing a cleaner book (i.e. you put each account into one of five models/strategies and just manage those models instead of managing individual portfolios for each of your 100 clients) etc... for example, under a non-discretionary platform, if every client holds a certain fund and the advisor turns sour on the fund and wants to move his client's money out of it he will literally have to call the mall up and get verbal consent. With discretionary you can simply make the change without permission (remember we are still fee based so the "churning" factor doesn't come into play) and furthermore, the discretionary trading system allows you to make changes to all accounts at the same time with block trades (along the same lines as the "managing 5 models" example from a couple sentences ago).

Non-discretionary accounts only charged the fee against the value of the "wrap" investments in the account (generally speaking "wrap" investments refer to traditional fee based investment products such as mutual funds and some other pooled investment vehicles) thus any "transaction-based" investments (i.e. individual stocks) or cash in the account are not included in the fee calculations (note: compensation for "transaction based" investments would come from commissions just as I described in my first post). Cash is never incorporated in any fee or commission calculation, so if a client is adamant about holding some level of cash you will see some advisors try to get them to put it in a money market mutual fund because then it would become a "wrap" investment... h/e this is a bit of a tough sell now a days with rates so low.

Spent zero time proofreading this so my bad if its too sloppy... just let me know if you need anything clarified.


Aside from the whole ethical dilemma of "churning" to increase commissions (which is old news, everyone knows creates a conflict of interest) the key is whether the rep a client is working with is acting as an Advisor or acting as a Broker.

Let's say you have a $1MM Merrill Lynch account, 25 individual stocks that you picked, and the only time you talk to your guy at ML is to have him rebalance your account or sell out of a position every now and then. In other words he is simply your broker and you only want to be charged per transaction. However, he is going to try to push you to put your $1MM into a fee based account for some BS reasons but in reality he just wants the quarterly fee to add to his predictable revenue stream. E*Trade and the like were created to service these types of investors, but a lot of people still keep their money with a rep even if they only act as a Broker.

However, if you are a hands off investor and your ML rep is managing your money, providing recommendations, and meeting with you regularly to review your portfolio then a fee based account is appropriate because when he tells you that you don't have enough EM exposure or you need to take some of your $ out of equities and put it into fixed income then you're not wondering if he has any ulterior motives because any changes in a fee based account won't bump up his compensation. He/she will actually be motivated to grow your account value because 1% fee on $1MM is a lot different than a 1% fee on $2MM

However this is not without its own ethical dilemma, because this type of situation will now cause Advisors to push clients to get out of cash as much as possible and be fully invested all the time, regardless if cash is the smart place to be or not at the moment.

That was just a rant but hope it helped... the point is "fee based accounts" and "transaction based accounts" are just products and services created to serve the different needs of their customers, so its hard to argue for one over the other that can blanket all scenarios... sort of an apples and oranges situation, IMO.


Wow, thanks for the insight!

In reply to J_monkey

The Kid, nice post!

Thanks a lot, really appreciate it... I guess I have a wealth of knowledge/experiences that is untapped because not too many people here are very curious about PWM haha

In reply to The Kid
The Kid:

The Kid, nice post!

Thanks a lot, really appreciate it... I guess I have a wealth of knowledge/experiences that is untapped because not too many people here are very curious about PWM haha

Why did you get out of PWM and what do you do now?

In reply to txjustin

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