Performance-based fees gaining ground among advisors, study says

investmentnews.com:

Fees are how advisors make their money from clients, and while there are several ways advisors can structure fees, there’s one structure in particular that seems to be trending.  

A recent Advyzon study found that performance-based billing, a fee structure typically associated with hedge funds, is seeing more advisors using it.

Performance-based fees have a troubled past, and an advisor’s compensation can be curtailed for underperforming a benchmark – even if the portfolio itself was up with the market. And if advisors participate to a greater extent in the relative outperformance of the benchmark, they have an extra incentive to try to beat it.

“With performance-based billing, certain fees are triggered only when assets perform well enough to pass a specified threshold,” Advyzon said in the study. “While some investors might shun this type of fee structure as overly complex, others might gravitate toward it.”

But what do advisors think? As it turns out, many are divided when it comes to fee structures.

Andrew J. Evans, CEO and founder of Rossby Financial, an RIA platform, says he doesn’t use performance-based fees.

“When you embrace that, you are working in a very specific way of running money,” he says. “You are specifically looking at every investment, looking for things that will absolutely grow, and things that you can get out of.

“For us, it’s better to work off a general wealth management model, where, for the products and services that we provide, the client is paying a flat fee or a singular cost, like a tier or a break point, and that’s that,” Evans added.

Catherine Avery, founder and CEO of CAIM, said that while her firm is performance-based, it tends to keep the fee percentage below the market.

“We want to