In response to my July Investment Advisor column “Upping the Ante,” I received the following email, which raises a question on the minds of many advisors these days, namely higher fees:
“I am a CPA finally following my passion by dramatically reducing my accounting and tax responsibilities to focus primarily on asset management and retirement planning. I am trying to ramp up the asset management side as quickly as possible. I have been discounting my fees at times to build my practice (and offering to continue filing 1040s as a complimentary part of my asset management fee), but I think I may be giving away too much. Your article indicates that I may be able to adjust my AUM fees upward.
I am currently charging 1% maximum to accounts <$500k and sliding downward to 60bps for accounts over $1mm. Assuming I am offering sufficient value to my clients, is it possible to go back to some of these people and ask for an upward adjustment to their asset management fee without sounding like I am reneging on our original agreement? Or do you think it would be better to ask for them to participate in the tax prep cost?”
With the caveat that these are only my impressions, based in part on the work done by Dan Inveen and Eliza DePardo at FA Insight in their paper for Pershing, “Pricing Strategies to Create Growth: An Independent Advisor’s Guide,” here’s my answer: Yes, I think that the flood of breakaway brokers is moving the standard AUM fee up from independents' traditional 1%. 1.50% feels too high to me, but something in the 1.25% range seems both defensible as a fiduciary and not likely to raise any client eyebrows. With that said, raising client fees during or soon after tough markets does not seem to sit well with clients (while during a big bull market, most clients wouldn't bat an eye). Probably better to simply raise fees for new clients. While that can make things around the office a bit complicated, it's not really different from charging larger accounts less.
Your idea of charging separately for tax returns (and/or financial planning) is a popular one. Still, I've heard of two issues with that you might want to consider. First, by separating payments for returns or planning, clients often get the message that these things are optional; I've heard of firms lowering their AUM fees and charging a flat annual planning fee, only to have most of their clients drop the planning in the second or third year, paying only the lower fees.
Related to that is the question of how important doing the returns or the planning is to your overall advice. I know many accountant/advisors who feel that doing client returns is integral to understanding their financial situation. Of course, financial planners feel that way about planning. If you charge separately for either, you send the message that they are separate services from investment management, and as I said, that they are "optional."
On balance, it seems to me that simply raising fees on new clients may be the best option. In my experience, the key to charging a fee for anything is believing in your heart that what you're asking is fair. Then you can simply tell them; here are all the things I'm going to do for you (many of which are quite time consuming); here's what a broker would charge to do quite a bit less (optional)’ and here's what I'm going to charge. From the client focus groups I've seen, they'll know if you're comfortable with your fee, and if you are, they'll be comfortable with it, too.