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.