#394 2015 · Ritholtz Wealth Management · Financial services / wealth managementincentive-flip
Ritholtz Wealth Management cut its fees only for clients who did nothing for three years
the problem
Panic-selling in a downturn wrecks returns more than bad picks do
background
Financial advisors are typically paid a percentage of assets under management, a fee structure that says nothing about whether a client's own behavior helps or hurts their returns. The single biggest driver of a typical investor's underperformance against the market isn't a bad stock pick or a high fee — it's behavioral: selling in a panic during a downturn and buying back in only after the recovery has already happened, locking in the loss and missing the rebound.
Every incentive in a standard advisory relationship runs the wrong way on this. A client who panics and pulls out is easy for the firm to accommodate, since it still gets paid on whatever assets remain, and nothing in a standard fee schedule rewards staying the course through a bad quarter — the discipline of not trading has to come entirely from the client's own willpower, with no financial encouragement built into what they're paying for.
the move
In September 2015, on the firm's second anniversary, Ritholtz Wealth Management (co-founded by Josh Brown and Barry Ritholtz) announced that any client who stayed invested with the firm for a full 36 months would automatically receive a fee reduction worth roughly 16% a year, with further reductions at later tenure milestones — a discount triggered purely by not leaving, an idea Brown said he drew from a Wall Street Journal report on hedge funds offering similar loyalty-tiered fees.
the payoff
The roughly 16%-per-year fee cut applies automatically once a client crosses the three-year mark. Brown framed the logic directly: the firm 'constantly preach[es] the message that behavior is the most important determinant of investment success over the long term,' and the fee itself, not just the advice, was redesigned to reward that behavior.
what came after
The program is cited in wealth-management trade press as an example of a fee structure engineered around behavioral finance rather than assets or performance — pricing the one variable, staying invested through volatility, that most determines whether a client actually captures the returns the market offered instead of trading their way out of them.
filed under
references
- [1]Ritholtz Lowering Fees For Long-Term ClientsWealthManagement.com, 2015wealthmanagement.com
- [2]This firm has a radical new plan to keep clients focused on long-term investingYahoo Finance, 2015finance.yahoo.com