Advisors are keenly watching the markets. Using all the navigational tools available to them, they’re waiting for signs that the financial tide is turning, that recessional clouds are going to clear up, that their practice, or “boat” if you will, is sailing on to more favorable waters. Is your firm ready for a change in the economic weather? It’s a question worth considering since rising tides and sunny skies mean nothing if your boat has a leak. Let’s examine your boat to make sure it’s seaworthy; in this month’s article, we take a look at some of the changes advisors made in 2008 to position their practices for that year’s challenging economic environment and what they’ve done to be ready for better times ahead.
While more than half of advisors surveyed (60%) said they want to improve their ability to offer a wider range of services, only 12% of advisors surveyed said that they have actually added additional services to their businesses.
More advisors offered trust services in 2008 (15%) than in 2007 (9%), while fewer advisors were offering charitable giving planning (42% vs. 54%)–the reason being that advisors aren’t entirely comfortable with their level of expertise in these areas. Also, beyond standard retirement income planning, several advisors in the study indicated they are providing health care and elder care planning to their clients (see Chart 1).
Advisors were less likely to outsource in 2008 than in years past (see Chart 2). Since most investment advisory firms were in a state of uncertainty, they brought some of their previously outsourced functions back in house.
It’s interesting to note that younger firms tend to outsource more than their more established peers in order to gain leverage.
Asset management fees continue to be advisors’ main source of revenue and most advisors (79%) have not changed their pricing structure (see Chart 3). Only a few advisors implemented a retainer fee program to be compensated for providing additional support for more complicated investment situations such as ongoing stock options to be exercised, a small business, rental properties, or a need for regular income from investments, all of which require extra effort and time. Most advisors have not moved aggressively to charge any kind of retainer or project fee or other kind of non-asset management fee. We forecast that this type of fee structure will be increasingly popular going forward due to clients’ more complex investment demands.
There are various opinions on the appropriate amount to charge for retainer fees. Amounts vary based on geographic location, level of wealth, project complexity and the advisor’s view of the services. Among those 25% of advisors who charge a separate fee for planning and asset management, more than half charge a fee for specific projects (61%) and/or an hourly rate (54%).
We think that annual retainer fees are something investment advisors should consider if they are serious about providing ongoing progress updates to their clients. Advisors might also consider treating asset management and financial planning as two distinct services.