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Financial Planning > Behavioral Finance

AUM or Flat Fees? Start and End With Your Clients’ Needs

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Unless you live in rural Afghanistan, you’re probably aware of the current conversation going on in the independent advisory industry about whether flat retainer fees might be better for clients (and advisors) than AUM fees.

As far as I can tell, most of the discussion is focused around whether flat fees have fewer conflicts with client interests, are more in line with financial planning services, provide more predictable advisory revenues, and/or better align advisor-client interests than does the AUM fee business model.

In our experience, the answers are: maybe, yes, definitely, and probably not.

(See a sampling of Bob Clark’s blogs on the topic: The Case for Charging Both AUM and Flat Fees and Are Flat Fees Really Better for Clients—or for Advisors?)

More important, though, our experience also tells us that for most advisory firms today, thinking about their fee structure should be way down on their to-do lists. Contrary to much of the conversation that I’ve seen, determining one’s compensation structure isn’t a moral statement; it’s a business decision.

Moreover, it’s a business decision that can only be arrived at after firm owner(s) have determined who their target clients are, what the needs of those clients are, and which of those needs their business is going to provide. Only then can they decide how they’re going to charge for those services. 

For instance, if your target market is small business owners, and you’ve decided to provide their business insurance (in addition to other services), the law says you’re going to have to charge commissions. Or if you work with successful stock brokers, who like to brainstorm about stock ideas, and frequently trade on them, you’re going to have to charge securities commissions. And if you work with wealthy widows, you’ll probably need to register with banking regulators to charge a fee for trust advice.

Once you’ve determined who your target clients are and what services you’re going to provide to them, there’s still one more thing you have to do before you start thinking about your compensation: articulate your “value proposition.” What does that mean? Figure out exactly how you’re going to describe what you do for your target clients in a way that resonates with them.

Once you know how to tell your target clients what they want to hear, then you can decide how to charge them—based on their needs, not yours.

In our experience, firms that can do this are way more successful.

Here’s an example. Many of today’s flat-fee advocates say that charging AUM fees devalues financial planning in the eyes of an advisors clients. While it’s true that many advisory clients don’t place a high value on financial planning, it’s not due to AUM fees. The problem is that most financial planners can’t articulate a value proposition for financial planning that resonates with their clients: telling them why a financial plan is essential to their financial futures. 

The financial planners that we’ve seen with successful value propositions focus on financial planning as a dynamic, ongoing process, rather than just a one-time event, with periodic updates.

Clients’ lives are constantly changing, as are their needs and wants. And the clients themselves are constantly changing too: their plans, their needs and their goals—as well as those of their families.

Rather than seeing these changes as unexpected, one-off events, these planners see changes as regular events in an ongoing planning process. What’s more, many of these planners take their dynamic planning approach one step further: assuming the responsibility to keep clients’ other advisors (accountants, lawyers, insurance agents, trust executors and officers, etc.) up to date on, and in sync with, these changing financial plans.

By focusing on the needs of their clients, and providing services that meet those needs, advisors can create a value proposition for their clients and target clients that makes appropriate modes of compensation a no-brainer.

That is, once the client can see the value in dynamic, ongoing planning, you can charge a flat fee for that. If you also manage their assets, charge an AUM fee. If you do their taxes, charge a fee for that. If you provide insurance, charge a commission for that. And so on.

In our experience, the key to success in the advisory business is to be able to tell your target clients that you offer the services they need and want. Once you do that, how they pay for those services is an afterthought to them. It should be one to their advisor, too. 


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