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.
This growing use of consulting fees has helped reduce the reliance on asset-management fees as a primary source of revenue. Sure enough, in 2002 asset-management fees made up just 75% of total revenues, down from more than 80% in 2001 and more than 85% in 2000, as shown in chart 2.
Additionally, the median hourly fee charged for financial planning services jumped from $150 in 2001 to $190 in 2002.
The Positive Effect
Consulting fees serve to offset declining asset-management-fee revenues, which alone does not justify the amount of time and work needed to formulate and implement the increasingly sophisticated financial plans. It also ensures that a minimum amount of revenue is generated from clients with accounts that fall below the minimum account size. Even more important, charging such fees takes the clients’ focus away from asset management and places more emphasis on the firm’s overall advisory services, thus boosting your perceived value.
If you’re seeing your revenues suffer as a result of the decline in assets, consider increasing the use of consulting fees when appropriate. To the extent that you can clearly communicate to your clients the reasoning for these fees, this pricing method should help enhance your financial performance.
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