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4 uncommon advisory fee structures

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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.”

3. Assets under advisement fee

SEI examines whether advisors charge for assets under advisement, or “held away” assets, typically a 401(k), 403(b) or 529 plan.

Lee considers these assets as “something that you may not have directly under your management and you won’t be able to change and truly manage those assets, but you are giving the clients some sort of advice on what to do with them.”

According to its survey results, 45 percent of advisors say that they charge in some way for those assets. They charge, typically, around 50 basis points, or around half their normal fee.

What advisors should do: 

Lee cautions against using this particular fee model.

“This is an area where there’s been a lot of change, in that you’ve got companies like and other areas where the aggregation capability, which is what’s necessary to do this type of advice, is becoming almost free to investors,” Lee said. “The value for them to be able to look across and see all of their assets is not nearly as valuable as it used to be.”

Lee does point out one case where he sees this type of fee makes sense.

“If you are trying to coordinate multiple pools of money or multiple generations and your key value is to look across all of that information and give advice, then that makes more sense as to why you’re charging for that.”

4. Salary plus total net worth fee structure

A “brand new” fee model that SEI examines is a fee based on salary plus total net worth.

“We’ve seen at least two companies, maybe more, look at this,” Lee said. “This is a different model, which is the concept of doing a salary plus total net worth as the base of what you charge.”

For example, say a client has a net worth of $1.5 million, AUM of $1 million and a salary of $250,000. If an advisor charges 1 percent of net worth plus 0.5 percent of salary, advisor fees would equal $16,250. Whereas, under the AUM fee model, 1 percent of the AUM would be $10,000.

“Why is this interesting? It’s interesting because it really does align the client with the advisor because … clearly the client wants their net worth to grow,” Lee said.

What advisors should do: 

Because this fee model is so new, Lee is cautionary.

“There’s certainly some early adopters that are doing it, but if you were using this sort of model you’d really have to explain to the client out of scratch what this is about,” he said.

See also:

Be ready: 8 questions clients will ask before purchasing an annuity

Your answer to the fees question

Shifting from commissions to fees


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