What are the conflicts of interest for fee-only advisors? I just started working at a company that sits at an intersection with the financial industry, and I'm trying to get a better understanding of how this works, because a lot of clients have a relationship with these advisors (fee-only).
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I've already read in the literature that they tend to be more conservative and go for assets that don't fluctuate much, because the firm's cash flow is proportional to the client's AUM. In other words, it's better to be stable and grow slow but steady than to have vol, even if that leaves the client with a smaller net worth in the long run. So at the end of the day the firm makes its money on the number of clients it brings in.
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The theoretical advantage is that the client keeps the rebates and the advisor doesn't have the conflicts that your typical Edward Jones or Merrill broker has, of being paid by the product instead of by the client.
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Now...
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I pull up the clients' portfolios, people with 10, 20, 30 million, and there are some unexplainable allocations.
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Examples:
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8 (eight!) money market funds in the same portfolio! They do the same thing as just holding T-bills, but charging a fee. There's no real diversification in having 8 managers running the exact same strategy.
A 31-year-old guy had 1.5% of his net worth in REITs. AUM: 13 million. What's the point of a 1.5% position in a pointless asset for a guy who must pull at least 200K in income from his businesses??
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Another one had an offshore account and all that shit, and the dude crammed in ADRs of the SAME companies he already had exposure to abroad. Detail: like 15 ADRs with tiny allocations. Why do stock picking with ADRs when you've got an offshore account and you're allocating so little?
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I keep thinking that sometimes it seems like these guys want to check a box on every type of asset and every manager.
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Is there some kind of indirect compensation from the platforms, Schwab, Fidelity, LPL, etc., for these fee-only advisors? The more product types the more money, or something like that?
Do the fund managers give these people some kind of perk? Soft dollars?
Anyone know the deal?