In a new initiative, more and more advisors are turning to hybrid compensation models—a monthly retainer, say, paired with an AUM fee—in order to expand their client base.
The move is being driven in part by next-gen advisors who want to offer financial planning services to younger clients who haven’t yet built up much in the way of investable assets.
“You’re not going to make a huge living off of AUM with this demographic. It’s not a sustainable lifestyle. This is the sort of thing that causes models to change,” says Jamie Hopkins, professor of taxation at The American College in Bryn Mawr, Pennsylvania. “You have to look at other options and adjust to the market.”
Innovation is taking place at the high end of the market as well.
Veteran advisor Leonard Raskin, who heads Raskin Global in Hunt Valley, Maryland, charges a flat “complexity-based” consulting fee, ranging from $1,000 to $50,000, at the start of the client engagement. After that, there is a membership fee for clients who implement elsewhere but want continuing advice. Those who park their assets with Raskin are charged an AUM fee of 1.25% to 0.5%. The greater the assets, the smaller the fee.
Raskin, who manages $240 million in assets, also uses the online questionnaire Survey Monkey to query clients about proposed changes to his service offering. If we offered this service, would you avail yourself of it through our firm? Would you be willing to pay for that service? If so, how much?
As a result of two recent surveys, Raskin Global will soon begin offering high-level access to banking and lending, and will bring tax planning in-house. Up next: a monthly membership fee that will get clients connected to services such as a social media consultant who can set up a LinkedIn or Facebook business page, or an office service with scanning, faxing and notary capabilities. The fee could be as low as $25 or as high as $200, depending on the level of service.
“I don’t give out free advice. We are worth every penny you pay us and we probably don’t charge enough,” says Raskin. “Most people appreciate that we are expanding our offerings. And as the offering broadens, the way we should be compensated for that adjusts.”
The focus on financial transparency and the continuing transition to fee-based advice models are also causing advisors to rethink how they are compensated. According to PriceMetrix’s annual report on the state of wealth management, 31% of assets were held in fee-based accounts in 2013, up from 23% in 2010.
“Obviously, we want to get to transparency so the consumer knows exactly what we are talking about. You don’t have to tell them how much you’re getting paid, that’s not the issue,” says Hopkins. “The issue is what they are being charged. They don’t need to know how much money you make in a year. What’s important is the impact on them as a consumer.”
It concerns Hopkins that financial planners often get paid an assets under management fee but do the planning itself for free.
“Our job is not to make sure the market goes up or down, it’s to provide a financial plan. Yet we throw that in for free and charge for how the market does,” he adds. “Does that really make sense?”
Dennis Breier, an advisor for five years, recently formed an RIA, Fairwater Wealth Management, in Burr Ridge, Illinois, so that he could move away from the AUM fee and market to young professionals who will pay a $250 monthly fee instead. For clients who wish it, the firm will also manage money in passively managed portfolios for 50 basis points. In that case, the monthly fee will drop to $199.
“If your plumber came to your house and said ‘We fixed your toilet and attached a device to it that measures the amount of flushes you make every month and we’ll charge you a percentage of those flushes. So don’t worry about paying us today,’ you would fall on the floor. Yet financial advisors charge like this every day,” said Breier, who currently manages $15 million in assets.
“The bottom line is this: The difference in service between the $700,000 client and the $1 million client is three grand. That’s not right. I realized, and I think clients are beginning to realize, that managing money is not the earth shattering process that many advisors make it out to be. The model doesn’t make sense. If your fee is actually for financial planning and ongoing holistic advice, then the client should be charged a flat monthly fee for that service.”
How do you tell clients that you are going to change the way you get paid? Very carefully.
As John Anderson, managing director of practice management solutions for the SEI Advisor Network, puts it: “Words matter. Think about how the client will hear what you say, not about how you want to say it. As with everything, it starts with a plan. Because if you do it wrong, the client feels violated.”
Anderson recommends creating a one-page client service statement that outlines all of the services the advisor provides to fully demonstrate the depth and breadth of the offering.
“If your clients don’t know all that you offer, you have to tell them,” says Anderson, who suggests “practicing” on easy clients first. “Start with the clients you know will do what you want. Then talk to the ones that might want a little more information. Next, talk to those tough clients. By the time you get to the 10th, 20th, 30th client, you have this down cold. It’s practicing on the easy clients while preparing for the most difficult ones.”
Anderson also suggests framing the conversation as the evolution of a business model. “We’re going to graduate you to a new level of service. The economy has changed. We’re changing alongside that.” One advisor he knows uses Apple—which years ago had one product: a computer—to illustrate enhancements to a service offering. Another advisor refers to advances in medical science. “Doctors did the best they could with the available resources and knowledge they had at the time. But we know so much more today. The offering has broadened and the way we charge has changed as a result.”
When advisor Matthew Boersen switched to a fee-only model from a hybrid arrangement last year, he was surprised at how tricky the conversation got—especially since most of his clients’ expenses actually dropped fairly significantly when Boersen moved them from fee-share mutual funds to commission-free ETFs.
“When they get that invoice now, they see a dollar figure instead of a percentage. Even though they knew in the back of their mind that it was cheaper, they see that hard number and they feel like they’re paying a bill,” says Boersen, who heads Straight Path Wealth Management in Grand Rapids, Michigan. The 26-year-old manages $18 million in assets. “The change in psychology was surprising. It puts pressure on the advisor to work hard to justify that fee and provide value.”
Scott Stratton launched fee-only Good Life Wealth Management in Dallas in May because his previous employer had a million dollar minimum that had forced him to turn away friends and family who didn’t qualify.
“It was frustrating on a personal level,” says Stratton, who manages just under $5 million in assets. “As a profession, we want to help bring people up—not just work with those who are already well off. I wanted to help younger investors achieve their first million, as I did in my 30s.”
At the new firm, Stratton has developed a two-part fee structure. Clients with over $250,000 in investable assets pay a 1% AUM fee. Those with less than $250,000 are charged a monthly $99 retainer that they can pay by credit card or automatic monthly payments, or through account withdrawals.
“I think the retainer model is a great way to bring financial planning to a much larger market, although I still consider it to be somewhat of an experiment,” he said. “I want to reach that 90% of the population that isn’t currently being served by the RIA business.”
The AUM-only fee may have made sense years ago but advisor Alan Moore, who co-founded the XY Planning Network, says he is seeing a grassroots movement today toward flat monthly fees for financial planning services. XY Planning Network trains advisors on how to operate their business using the retainer model.
Why? The AUM fee structure only works for clients who have accumulated assets—a minority of consumers, according to Moore. The AUM also ties an advisor’s value strictly to investment management. “By charging fees for financial planning, clients see that they are paying for the valuable service of financial planning instead of the planning fees being essentially hidden in the AUM fee,” he added.
Moreover, he said, many young advisors don’t want to manage investments and need a new business model that doesn’t rely on asset management to charge clients. And flat monthly fees aren’t vulnerable to market fluctuations.
Finally, Moore observes: “Younger clients are accustomed to paying for their lives monthly so why wouldn’t they want to pay their financial advisor monthly? This is a fee structure that intuitively makes sense to clients. The only folks that think the monthly fee structure is a bad one are other advisors that have been charging quarterly AUM fees.”
Ten years out, Moore believes the monthly retainer model will be the dominant fee arrangement used to provide financial planning while AUM will become a niche fee structure only used with high-net-worth clients.
Eric Chen, associate professor of business administration at University of St. Joseph in West Hartford, Connecticut, says consumers may one day gravitate toward an additional option: hourly rates.
“Advisors do have a level of skill and experience. There’s no reason they shouldn’t be paid like a lawyer or an accountant,” he said. “But no matter what, in order to sell this shift in compensation, the client needs to accept that the advisor is providing expertise and value. This value needs to be communicated with clarity, based in dollars and cents.”
Still, Chen added: “It’s taken this long for the AUM fee to be accepted. This was supposed to be the solution to transactional fees. Now you’re asking us to change that again? It’s going to take some getting used to. It’s going to take some education.”
Editor’s Note: This article has been modified to provide the correct name of Jamie Hopkins of The American College in Bryn Mawr, Pennsylvania.