Why aren't there advisor fee structures that are more fair to the client?

Is there a financial advisor that has a fee based on the percentage of profit made from the investments that they recommend and make with a client's money? This seems like a fair way to structure client fees. For example, if a client's portfolio sees a gain of $10,000 at the end of the year, the financial advisor takes a pre-negotiated percentage of the profit. If the portfolio has no growth or a loss for that year, than there should be no fee. Right now, my advisor is the only one making money off of our investments, and I am suffering losses from fees on top of losses from investments. Why isn't there a more fair fee structure implemented by financial advisors?

Investing, Asset Allocation, Choosing an Advisor
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August 2017
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There are two answers to your question. First, perfomance based fees are prohibited except for accredited investors by the SEC. While there are several categories of accredited investors, like institutions a minimum requirement for an individual is $1,000,000 net worth. Accredited investors are deemed by the SEC to be more sophisticated and more capable of understanding investments and investment risk. The reasoning is this: mathematically charging a performance based fee the advisor can benefit from utilizing multiple high risk strategies. Hitting a home run on one portfolio and making nothing on others could still provide much higher compensation then a level, much lower fee. Performance based fees can promote risky strategies and advisors misleading about that risk.

Second reason is more practical. No advisor can control the stock market. Is it fair to punish an advisor for something out of their control? From 2000 - 2002 most indices recorded three consecutive years of losses. While you might argue that the tech wreck was "foreseeable", no one could have been expected to see the events of 9/11. Point being if advisors received no compensation in bear markets, the industry would have been wiped out by the end of 2002. I'll also add that this job is relatively easy in bull markets, but I work my tail end off during bear markets to minimize losses and look for opportunities. If my clients lose say 15% when the index funds are down 40%, isn't that worth payng for? 

Not paying in a down market would be like asking for your money back if you went to a baseball game and your team didn't win - why pay to watch your team lose?

On a serious and final note - this is not meant to justify poor long term performance. In the short run some strategies will lag while others lead. More conservative strategies have given way to riskier growth strategies. What's important is that you understand the strategy your advisor is implementing for you and why. If he/she can't give you a clear investment policy for your account, then you should consider moving on.

August 2017
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August 2017