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Practice Management > Compensation and Fees

The Right Way to Charge an AUM Fee and a Retainer

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In response to my Oct. 4 blog “Split Decision,” Marc Lafontaine asked for further guidance about balancing asset-based fees with fixed retainers. “I agree with you, but still find there is a ‘cap’ on how much clients are willing to pay for the annual retainer portion of the service. So we found we needed to keep the AUM portion a little higher to cover the expense that the retainer fee doesn’t cover for the financial planning and tax work. Can you offer any guidelines?” 

To get some fee parameters for Marc and other readers, I went back to the source, advisory business management consultant (and my client) Angie Herbers. “The problem with simply charging flat retainers,” Angie reiterated, “is that when markets go down, the advisor is still getting paid the same (and actually, a raise, on a percentage basis). That bothers a lot of clients: they like to see their advisor with skin in the investment performance game.” 

But she also pointed out that there are dangers with charging a combination of AUM-based fees and fixed retainers. “The mistake that I’ve seen many advisors make is to charge, say, half their fee based on assets for investment management, and the other half in a retainer for financial planning. But then, the client looks at the flat fee and says, ‘I’ll just take the investment management, thank you very much.” 

The solution, she says, is two-fold: first, advisors have to “sell” their compensation as “one fee” based on their comprehensive services, with multiple components, which would typically include financial planning and investment management. I know, it sounds like semantics, but Angie insists it’s a key distinction. “Advisors need to be able to explain their services so that their clients get it: that they are comprehensive and it makes sense to calculate each charge in a different way,” she says. “If you’re not going to do that, you might as well stay with AUM fees.” 

The second step is to redesign your advisory practice so the clients can “see” the separate services for
themselves. “You have to actually deliver separate services,” she says. “The most successful way we’ve done this is for firms to have separate financial planning and investment management departments, complete with different people doing each. That way, when the client’ have a financial planning meeting, it’s with one person, while their investment meetings are with someone else. They can see these are separate services. I have one client that offers three services, with a separate tax department and a tax service fee.” 

Angie says it doesn’t really matter to the clients what portion of the fees pay for which service; but from the advisors’ perspective, it’s very important that they know what their costs are for each service, and that their fees reflect that ratio.

And, no matter how many services for which you charge separately, remember to make it very clear that your services are comprehensive. The undoing of fee/retainer comp programs is when the clients feel free to pick and choose.


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