There are two types of investing strategies
People constantly ask us if we we do fee based investing or transactional investing. In reality, they are asking how we charge our fees. This is a common and highly misunderstood question in the financial industry.
Fee based investing
Fee based investing is where you place your money in a portfolio and a percentage is charged to manage that money. That percentage is not based on trades made in the portfolio but on its value. The theory of fee based investing is that when the portfolio goes up the client and the advisor make more money. It’s a win/win situation, but if the portfolio goes down, both feel the pain.
The “Purist” will say you should only do fee based investing but I disagree. I disagree because of our ethics and values. When we know at Fi Plan Partners that a client’s money is going to be moved around a lot, fee based investing is in their best interest.
A case for transactional investing
Let’s say a client has tax free bonds. Tax free bonds are held for 10 years or more. In this case it would not be in the client’s best interest to put that in a fee based investing portfolio where it would get charged a quarterly fee when it’s just sitting there. Transactional investing is in the best interest of the client as it saves them quarterly fees. We believe that’s ethical as we are not charging the client just to stare at something. The same applies to highly concentrated stocks and there are other scenarios.
What is the best interest of the client?
The question, “What is best for the client; fee based investing or transactional investing?” is not the right question. The correct question is, “What strategy is in the best interest of the client?” Both fee based investing and transactional investing should be designed to be in the best interest of the client.
There are those that put marketing spins on this to influence investors. At Fi Plan Partners we educate our clients to understand the difference between transactional and fee based investing so they can understand the fees. Then, we analyze what is the most cost effective strategy for the client. We think that is fair.
What do you think? Please send me a comment. I’d love to hear your thoughts and questions.
Greg Powell, CIMA
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Greg Powell is President and CEO of Fi Plan Partners, an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
Find out more at https://fiplanpartners.com.