Not So Fast: A Cautionary Tale on Changing Your Advisory Fees

There’s been a lot of discussion in the media lately about advisory fees, especially the combination of a flat fee or retainer with the customary AUM fee. Years ago, after watching firm revenues plummet in the wake of the dot.com crash of 2001, I also became an advocate of advisors receiving a portion of their fees from a flat annual retainer. In fact, many of my clients went to just such a combined fee structure to smooth out their revenues. However, even though it seemed like a good idea at the time, our experience with mixed fees hasn’t been very good—many of my clients have subsequently stopped using flat fees—and I would caution advisors who are considering this “new” fee structure to reconsider. Here’s why. 

The first problem we ran into stemmed from separating advisory services. Most of my clients justified charging a flat fee to their clients by separating financial planning from investment management. The advisors then changed an annual flat fee for the planning, and then reduced their AUM fee so that the total worked out be about the same dollar amount (at least until the assets showed significant growth). So far so good: the clients understood the rationale, and we got virtually no resistance to the change. 

However, the seed had been planted in the clients’ minds that financial planning and investment management were separate services, paid for separately. So, after a couple of years of this combined payment, many clients began to feel that they weren’t really getting much ongoing benefit from the financial planning (which had largely been done on the front end), so they stopped paying the planning fee, but continued to get their assets managed at the new, discounted rate. 

I’d like to say we were smart enough to see this predictable aspect of human nature coming, but in fact, we weren’t. Consequently, our attempt to smooth out revenues merely resulted in decreasing the amount of market dependent reviews that our advisors received.