Under a performance fee model an adviser can charge an addition fee when they beat a pre-agreed investment performance target. Performance fees are more common in funds management, though they do still appear in the fees of some financial advisers.
Performance fees align the interests of customers and advisers, assuming the target is understood and agreed to by both parties.
Set the bar high
It is not surprising that advisers prefer to have a low target to maximise their chance of beating it. It is important to negotiate for an amount that you are comfortable with, rather than accepting a low goal.
Negotiation is key
You’ll also need to negotiate and protect yourself when an adviser under-performs, ensuring that they recoup their previous under-performance before new performance fees can be charged. If you aren't a skilled negotiator, this can be tricky.
Value tied to investments
The last challenge with performance fees, is that they place no value on advice that is not related to investments. For example, the estate planning and life insurance that is a key part of your financial health and critical if you have children.
Avoid them if you can
All in all, it is best to avoid performance fees unless you are a sophisticated investor who can negotiate an outcome that works in your favour.
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General advice disclaimer
This is general information only and does not take into account your personal objectives, financial situation or needs. You should assess whether the information is appropriate for you having regard to your objectives, financial situation and needs and consider obtaining independent professional advice before making an investment decision. If information relates to a specific financial product you should obtain a copy of the product disclosure statement for that product and consider that statement before make a decision whether to acquire the product.