Basic points: No value added tax


Although this isn't 1765 with its Stamp Act, it certainly feels like basic points are a tax imposed on financial advisers without a commensurate increase in added value to justify the cost.

The most obvious representation of how firms make a significant amount of money from the success of their independent advisors is program or platform fees (bps on assets) for asset management.

Breakdown of fees

Take a simple advisory practice with $30 million in AUM and growing to $60 million, for example. This is basic and will not include all additional costs including technology fees, E&O, etc.

base points table

What is the value of $69,000 in the first example and then $102,000 in the second example?

There is no added value regardless of the fees that are collected. The platform did not conduct marketing or sales to increase AUM. The lead firm most likely did not give the advisor a book of business to work tirelessly on. Firms must accurately justify these costs once an advisor moves their practice to their platform.

Revenue sharing models that include compliance costs are inherently unfair as they disproportionately burden higher-producing advisors. For example, a $100,000 advisor pays a 10% compliance “overhead” ($10,000), which matches the cost of supervision. But a $1 million advisor charging $100,000 for the same services highlights the inefficiency. Compliance burdens do not always increase proportionally with advisor production or AUM, meaning that larger advisors often subsidize smaller ones under these models.

Advisers should know all their options

None of these fees — overlays, technology fees, platform/program fees, annual review or E&O fees — alone are inherently bad. But in the aggregate, advisers may lose their profits thanks to these taxes.

There are other ways for counselors to get the services and resources they need than to have these taxes placed on them. Some emerging firms have dropped bps and fees in favor of a fixed or per-seat pricing model. It may be easier for advisors without these factors. In fact, it might even be less of a hassle for the platform.

Without bps and other fees, direct accounting can be used to run an organization.

Remove the excess

In fact, by removing the bps tax, firms can become even more efficient. Instead of paying the salary of a full-time marketing, compliance or other service team, part-time services can be used to eliminate excess capacity and lower costs.

Why are fees set this way? Because they always have been. But does this industry and investors really deserve it? No.

Advisors retain the final authority to determine their capital expenditures and have access to the information necessary to make informed decisions. Ultimately, broker/dealers, hybrids, RIAs and other platforms will create their own more profitable fee structures.

Andrew J. Evans is CEO of Rossby Financial, a technology-driven RIA.



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