Examining Retainers

In the last year or so, there has been much talk about the use of

retainer fees among independent advisors. For many, this compensation

model appears to present little benefit to either the firm or its

clients, compared to the more-prevalent assets under management (AUM)

fee model. Others, however, consider the use of retainers an improved

variation of the AUM model, one that effectively eliminates many of

its inherent shortcomings.

Based on AdvisorBenchmarking’s latest survey of 1,093 independent

advisors, we will provide in this issue a statistical assessment of

the retainer model among advisors, the impetus for its use, and the

outlook for its growth. Additional findings of our latest survey will

be featured in this newsletter throughout the remainder of the year

and in the 2004 annual RIA Marketplace Study , which will be available

in its entirety this fall.

Retainer Fees Defined

There is little consistency in the marketplace regarding the

definition of retainer fees. From a research and analysis standpoint,

AdvisorBenchmarking defines retainer fees as:

o A lump-sum payment that is charged once at the outset of the

client relationship and/or every year thereafter

o A fee that may apply to some, but not all, clients, and is

almost never the sole source of compensation for the firm

o A charge to the client as an addition to or in lieu of AUM or

other fees

o A fee that may vary by client and, in some cases, is tied to

the size of the client’s assets

o A fee that is non-inclusive of hourly fees for financial

planning

Using the definition above, our research shows that 27.3% of advisors

use retainer fees today. Among those advisors, around 22% of their

2003 revenues were generated from such fees. Curiously enough, a tiny

minority (1.2%) utilize retainer fees as the sole method of

compensation for the firm, generating 100% of their 2003 revenues. The

impact of retainers on revenues varies among advisors, as shown in

chart 1 below.

<img

src=”http://www.investmentadvisor.com/images/0604-Chart1.gif” alt=”"

width=”338″ height=”203″ border=”0″>

Why Use Retainer

Fees?

Many advisors cite such reasons as “ensuring objectivity” as

their motive for using retainer fees, referring to the fact that the

clients’ assets become irrelevant to compensation.

However, in line with our expectations, we found that the primary

explanation for the use of retainer fees (cited by 35.9% of advisors)

is the firm’s desire to ensure proper compensation for its

financial planning services. For years now, many advisors have

considered financial planning to be a loss leader, providing the

service for free in return for managing the client’s assets. But

in an era of complex wealth planning needs, some advisors are taking

the right step of properly charging for the valuable services they

render to clients.

A close second is the firm’s intention to emphasize its

non-investment management services (25.8%) and enhance the firm’s

perceived value beyond managing money. By charging clients based on

providing services other than the amount of assets, advisory firms

help clients more clearly understand that the firm’s value