The market conditions of the last three years have triggered advisors to question some long-held beliefs regarding their business models. Most notable among these is the soundness of the fee-based pricing model in such a protracted bear market. With asset-management fees comprising as much as 85% of total revenues in 2000 (according to a survey of 586 firms for that year), the decline in assets during the bear market has taken its toll on revenues, as shown in chart 1 below.
Sample of 586 firms for 1999, 601 for 2000, 654 for 2001 and 655 firms for 2002
In addition, the steep market and economic decline–having occurred on the heels of a stellar bull market–have left many clients with extremely convoluted financial situations. As such, clients are demanding more sophisticated financial advice and more handholding from their advisors.
In essence, advisors are spending more time serving clients, while getting paid less.
Increased Shift to Planning/Consulting Fees
With those new realities in the backdrop, many RIA firms have increased their use of planning and consulting fees in the last two years. Such fees are charged on top of asset management fees–typically to clients with additional and more complex financial planning needs. In other cases, the fees are structured as one-time retainers charged at the outset of the relationship. Those planning and consulting fees made up 23.45% of total revenues for our survey sample in 2002, up substantially from 17.62% in 2001 and 11.49% in 2000, as shown in chart 2 below.
Sample of 601 firms for 2000, 654 for 2001 and 655 firms for 2002.