In response to my September 27 blog titled “Is Now the Time to Switch From Asset-Based to Flat Fees?,” which described the flaws in the advisor business model using asset-based fees that can fluctuate wildly, Harold Evensky, of Evensky & Katz in Coral Gables, Fla., was kind enough to send me an email explaining his firm’s current position: “Bob, intellectually I believe retainer fees were and remain the appropriate way for us to bill; unfortunately after a few years of unsuccessful attempts we’re back to AUM.”

From what I’ve been able to tell, Harold’s experience is not uncommon for those advisors who attempt to smoothe out their revenues by transitioning to retainer-based fees. “Ben” posted a comment to my blog, offering another viable solution: “It seems to me that either/or is not the answer. A portion of our work is foundational, account administration, reporting, billing, titling, beneficiary, educational and fixed overhead required by both business operations and regulation.  It seems to me that these functions might well be supported by a flat fee or retainer. But the business of investment management is one in which the clients seek to have someone truly “invested” in how well they are doing also, the idea that I earn more or less when you do is a way to help develop that relationship. Perhaps a good retainer per client and/or account plus a much lower asset-based fee from which to generate owner return profits for the firm, bonus might be the best model….” 

In support of Ben’s solution, practice management consultant Angie Herbers, in Manhattan, Ks. (and a long-time client of mine) has been recommending that her advisor clients charge a combination of a flat retainer and asset-based fees. She developed this formula shortly after witnessing her advisor clients’ revenues plummet during the Dot.Com crash of 2001. “I realized then that there was something fundamentally wrong with a business model tied solely to asset-based fees,” she’s told me on many occasions. “For a while, we tried going to retainers alone, but we quickly realized that getting clients who are paying fees based on assets to switch to flat retainers is virtually impossible. But when we introduced partial retainer fees to cover non-investment related work such as financial planning, document reviews and updating, and client communications and regular client meetings, we found very little client resistance. The result has been that our advisory firm revenues have been much more reliable, and consequently, those businesses are much better able to stick to their strategic plans, even during very bad markets like 2008-2009.” 

Certainly, neither Angie nor I believe that even a mix of AUM fees and retainers is right for every situation. But transitioning independent advisory practices from glorified jobs into real businesses is made much easier when revenues can be stabilized during the inevitable and regular downturns in the financial markets. With the markets slowing recovering, and the Mortgage Meltdown still fresh in our minds, it’s a good time to think about a workable solution.