Kitces & Carl Ep 64: Why AUM Keeps Growing Despite Opportunities For Flat-Fee Clients

[kalebpaddock]

Michael, one comment I'd like to make is that if a firm pitches her 0.20% on the $12MM then she's going to eventually be paying $50k+ over time. It's empirically self-evident that capital markets rise over time so her $12MM will (most likely) become $25MM+ over time. What I'm saying is that some Clients want the assurance that the pricing is fixed for the work provided. Sure, add COLAs over time, but fixed pricing actually appeals to a significant amount of higher net worth folks and debiting the fixed pricing from investment accounts is just easier for both Clients and Advisors.

Ultimately, I think it's a philosophical belief this woman is driving at and she wants someone who empathizes with her belief and demonstrates that belief with the service model and pricing structure.

[theBearJewel]

Great discussion, thanks guys. Are you still shooting video for Kitces & Carl?

[ianburgess]

The money multiplier formula as a cost/fee structure is arguably the most backward methodology of purchasing goods/services. This is different from purchasing goods/services via a loan. When ownership is real, a % based model, even with breakpoints compounds into massive opportunity cost. Marginal costs should be diminishing for the client, not increasing as margins improve for advisors as AUM increases.

This is a tricky business, though. The client is always right and most try to leave it up to the client to decide "how much benefit am I getting?".

However, when we take the regulatory environment in to context of economic philosophy, there is a serious contradiction. No defined outcome, nor one that can be promised (Bid vs. Ask & Buyers vs. Sellers), yet a cost structure that functions like a mortgage, only to realize the assets are already yours...

I'm not say AUM is a bad model, it's actually probably the right model, right now, considering the clientele that broadly possess the most assets. However, the sub 35 age group is well aware of this model and very much ascribe to it as a variation of rentseeking.