As market conditions have become more challenging, investment advisors have slowly, yet steadily moved toward a planning or project fee compensation emphasis as opposed to AUM-based fee emphasis. The change is gradual-six years ago, AUM fees made up a bit more than 85% of the average advisor’s revenue mix, with planning/consulting fees contributing 11.49% to the bottom line. Commissions were about 2.5% of revenues. Fast forward five years to today and AUM fees still are the predominant revenue generator at 75%, but commissions have all but disappeared (1%) and planning/consulting fees now contribute to nearly one-fourth (24%) of the bottom line.

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Moving Away From AUM Fee Dominance

Most advisors employ multiple methods of compensation and are attempting to become less dependent on asset growth. This change is not surprising given that AUM fees many times do not cover the extra handholding and time-intensive attention needed by some clients for retirement planning and other project-based work.

Moreover, while a number of advisors have wisely implemented either a retainer or project fee program (ensuring payment for all the non-investment services they provide), our studies show that the lion’s share of income is still generated from assets under supervision. In our fall supplemental survey, we asked advisors whether they had changed their pricing strategy by adding a project or retainer based fee. Surprisingly, 73% of advisors said that they haven’t changed their fee structure. The percentage of remaining advisors who had added a fee or consulting component were evenly split between adding a retainer fee (13%) and adding a project fee (14%) program.

Adopting retainer fee or project fee programs has other benefits to your firm besides the obvious advantage of ensuring that you’re properly compensated for your time. One of the main pluses is that charging such fees broadens your clients’ focus from just asset management, and instead emphasizes the firm’s overall advisory services-thus boosting your perceived value. Another positive is that your revenue stream is protected as your clients begin to retire and their assets start to diminish, rather than build. Bill Starnes of Mallard Advisors in Newark, Delaware, explains, “Having a project fee program for comprehensive financial planning services is a more reasonable way to charge new clients since we can be compensated fairly and clients don’t feel like they are signing on to a long-term commitment. Clients are paying for the amount of attention that they receive from us and they can use our advisory services on an as-needed basis and evaluate our services prior to establishing a long-term relationship. It enables us to price our services fairly and to be as transparent as possible to the client so they better understand the effort that goes into their comprehensive financial plan.”

Making the Move

In the future, we expect to see a broader implementation of the retainer fee model. We think that retainer fees will become an increasingly significant component of many advisory firms’ revenue models. The two main factors fueling this growth are the industry’s move toward better compensation for advisors’ time and advisors’ repositioning efforts to put more emphasis on overall services and not just money management.

If you’re seeing your revenues suffer as a result of a decline in assets or feel that your AUM fees don’t adequately cover the time you’re spending on certain clients, you may want to consider adding or increasing your use of consulting fees as appropriate. Some examples of when such fees might be suitable include:

- At the start of a relationship with a new client. This is typically when you’re doing comprehensive reviews of their financial situation and specific needs and spending extraordinary amounts of time getting them started on a plan. You can also consider charging annual fees for thorough check-ups that go beyond your normal annual review services.

- Also consider this fee when you are planning on offering new services to small clients to compensate you for your time when AUM fees clearly don’t.

Of course, it’s important to make sure that your clients are aware of any price model changes. 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, keeping you on a firm path despite any volatile market conditions and changing client demographics.