Some might say the financial world is made artificially complex by its main actors because there is just so much money to be made. Many skilled individuals (and plenty of unskilled ones) try their luck here. Unfortunately, there are also many trusting clients who rely on others for their expertise–clients who may be vulnerable to scams by unscrupulous or inexperienced advisers.
As Warren Buffet once said, “Wall Street is the only place where people in Rolls Royces come to ask for advice from people who take the subway.”
Investment advisers can be categorised by how they are paid. They are either fee-based or commission-based. The former charges a flat rate for their services; the latter is compensated by commissions on financial transactions or products they sell you.
At Eu Capital, sometimes the harder route is the easier one to take. We are fee-based. Our clients pay a management fee so that they can have confidence in our transparency and the consistency in the quality of our advice. Our clients also pay us performance fees so that we make both money from the markets together. We tell clients we are expensive (for good reason!) and our track record shows we are worth it.
On the other hand, an adviser who is paid by commissions earns entirely based on the products he sells or the accounts he opens. These may include financial instruments such as insurance packages, mutual funds, and brokerage accounts. The more transactions they complete or the more accounts they open, the more they get paid.
This method of compensation is open to abuse as it rewards advisers for such things as active trading, and even selling clients products that are not ideal or even suitable. Of course not all advisers fall into bad ways, and in the end the discretion is entirely up to the client. But as we’ve learned throughout history, systems open to abuse tend to suffer abuse.
In our opinion, the management/performance fee structure best aligns the long-term interests and objectives of both parties. A forward-thinking client would be able to see that. To quote Warren Buffet once again, “performance comes, performance goes. But fees never falter.”