There have been arguments in the industry about whether the assets under management-based fee model still serves investors — or whether some other model would be better.
According to a recent SEI Advisor Network study, nearly 90 percent of advisors are currently using an AUM-based fee model in some capacity. But no fee strategy is one size fits all. Certain client situations, like small accounts or advice on assets held away, may be more suited to other fee structures.
SEI’s Raef Lee, head of new services and strategic partnerships, and John Anderson, head of practice management services, discussed the results of a recent survey of 775 financial advisors that examines the advisory fee landscape, pricing trends and different strategies during a webinar on Monday.
Based on its survey results, SEI looked at a few fee structures for special situations, and Lee offered his take on whether the strategies were advisable.
1. Retainer fee for small accounts
Of the 775 respondents to SEI’s survey, 74 percent did not have a fee structure for smaller accounts.
As SEI sees it, most advisors who serve small accounts are driven by a desire to lure HENRYs (High Earning, Not Rich Yet), a Gen X/Y advisor business model, referrals, merged books of business or early clients.
SEI finds that the typical fee structure for smaller accounts is some sort of flat retainer, rather than the typical AUM fee model. For example, a flat retainer varying from $600 to $5,000 a year.
What advisors should do:
Lee says a flat retainer wouldn’t work for all advisors.
“If you are going to charge a different fee structure for these smaller accounts, it means that you really should be offering a different service for these accounts,” Lee said.
However to differentiate between services and fee structures would mean a lot of work for the advisor.
“That is a fair amount of work to set that up as a different approach and service model and maybe even different people doing it,” Lee said. “What we find is that advisors don’t necessarily want to do that, and also advisors, to be honest, aren’t disciplined enough to be able to pull that off.”
According to Lee, small accounts would be a “very good way” to test out a retainer model to see if that model works for clients and advisors.
2. Financial planning fee
SEI found that 26 percent of the advisors surveyed charge fees based on an AUM model plus some sort of fee for initial financial planning. Typical fees are between $1,500 and $10,000 depending on service and client complexity, according to SEI.
What advisors should do:
“The amount of work necessary to do that initial financial plan is a lot,” Lee said. “Therefore, you’d think it’s a clear value and you should charge for it.”
However, he adds, that may not be clear to clients.
“If you have a brand new client, they really don’t know you and the first thing you’re doing is asking for quite a bit of money to perform a service,” Lee said. “So that’s a reason why some advisors decide not to do this.”
Lee also adds that financial planning is “fundamentally changing” from “the concept of an initial spike of work and then little work ongoing” to a co-planning model where advisors work with clients on an ongoing basis.
“It’s much easier in that model to show a value proposition, which means you should be getting paid for that financial planning advice on an ongoing basis,” Lee said. “In fact, we find that a whole series of advisors are using that approach and that explanation of a value proposition to justify the 100 basis-point AUM fee.”