Compensation is a one of those "hot-button" issues like religion and politics that aren't generally discussed in polite society because the conversation can degenerate into an argument based more on feelings than facts. The debate between those who firmly believe in compensation based on a percentage of AUM and those who don't can easily become emotionally charged.

The fact is that there is no perfect compensation system.  Commissions, AUM fees, project fees, retainers, and hourly rates all have their pros and cons. The question is, What system is most equitable for the advisor and the client? This is not an academic question. A compensation system that disproportionately favors one side will be displaced by another.

That is what happened to commission-based compensation. On May 1, 1975, the New York Stock Exchange ended fixed (non-negotiable) commissions, leading the way to innovations such as discount brokerage firms and no-load mutual funds. The commission-based model has been in decline ever since.

The change came after the most brutal bear market since the Great Depression and those two events led to a wrenching consolidation of the brokerage industry and a massive exodus of brokers into other lines of work. That the NYSE was forced to change the compensation model after investors had experienced such massive losses was not, I believe, coincidental.

Today, the prevailing compensation system is based on AUM. Whether it is "fair" is, like beauty, in the eye of the beholder. But if investors begin to perceive the AUM model as rewarding the advisor more than the client, some other compensation arrangement will displace it.

Investors have become increasingly knowledgeable over the past three decades. In addition, there is now a wide array of incredibly sophisticated resources available to any investor who is the least bit inclined to "do-it-yourself." Think about the free help the average investor can obtain from Vanguard, Fidelity, and MarketRiders, let alone the countless other low or no cost self-help websites.

As advisors, we all agree that investors need professional advice. How much advice is needed, what services are required, and how much it should cost are all a matter of opinion--and it is the investor's opinion that counts.

I see the need for a compensation model that is compatible with the growing desire of investors for a la carte services or incremental pricing based on establishing an initial plan (financial or investment) and adding services as needed or desired. AUM fees do not adequately address that market niche. Something else will.