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Incentives Matter

Our favorite part about pioneering a progressive, client centric business model is sharing our story with the investing public.  A recurring question comes up in those conversations regarding our unique fee structure.  Why does Pure Portfolios link fees to investment performance?  

We believe investment managers should be accountable for the job they are hired to do… grow client assets.  The industry has created an environment of asset gathering and sales goals which drive advisor behavior.  Portfolio management and client service are more of a necessary chore rather than a priority.  We feel that accountability for investment results and alignment of incentives would yield better investor outcomes.  For performance-based clients, Pure provides a 25% discount off the 0.80% annual fee if we do not meet or exceed our hurdle rate (net of fees) in any calendar year. However, the genesis of fees tied to client outcomes runs through a deeper set of values.  

The Wells Fargo cross-selling scandal is an example of how misaligned incentives can harm clients, employees, and corporations.  It’s perplexing how a similar misalignment of incentives has existed within wealth management for decades.  Investment management firms and the financial advisors they employ are incentivized (through compensation plans) to gather assets and focus on sales.  On the flip side, clients hire investment management firms and financial advisors to grow their wealth.  Once the sales cycle is complete, the advisor is off chasing the next deal.  Furthermore, there is no direct link between an advisor’s compensation and the client’s investment performance.  The ongoing service of the new relationship will be enough to keep the client retained, but the misalignment of incentives often leads to sub-optimal investment results.  After all, how can advisors prudently manage the assets andhit their lofty sales/revenue goals?  The answer is through a web of distraction.  

•    Making it impossible to find investment performance– have you ever noticed how your investment statement does not show performance information?  They purposefully make statements difficult to navigate so you will be more likely to dismiss than scrutinize.  •    Never showing net of fee performance– the information is available to your advisor, but they wouldn’t dare show it unless requested.  Do you think the advisor would be inclined to hide net of fee performance information if it was outstanding?  Net of fee performance is often lousy and they don’t want you to know the total cost of investing.   •    Explaining away poor performance– there are a myriad of excuses advisors can use to mask poorly managed portfolios.   •    Social distraction– dinners, events, guest speakers are nice but clients should not lose track of what the advisor has been hired to do.  Many of these events are often sales-driven… how many times has your advisor asked you to invite a friend?   •    Selling you other products and services– it’s easy to fire your investment manager if you only have one account at the institution.  It becomes more sticky if you have a checking/savings account, credit card, line of credit, etc. (Wells Fargo cross-selling!). 

So, how is Pure Portfolios shaping the future of wealth management?  We link investment management fees to client results.  Net of fee performance is available 24/7 via our Pure Portfolios client portal.  We believe the best connections are made on client terms.  We do not cross-sell any products or services to clients, and we will never give client facing associates sales goals.  

The establishment will not like it, but the status quo is not good enough anymore.  It’s time to create a more client focused wealth management industry.  Pure Portfolios is doing our part by delivering  a service that strips out misaligned incentives and conflicts of interest leading to better investor outcomes.

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