The time is right for financial advisors to make the switch to retainer-based planning, as this fee model is fast overtaking the industry. Making the switch to retainer-based financial planning can help a firm gain a foothold with high-net-worth clients. This method of planning makes regulatory compliance straightforward and reduces the risk of sanctions.
Retainer-based planning accelerates the outcomes of a business while eliminating possible conflicts of interest that might interfere with a company’s business model. This particular financial planning model provides ideal outcomes for clients, elevates the size of a practice and overall creates efficiency for a financing planning firm.
For more reasons why you should consider switching to retainer-based planning, check out my previous article. But now, let’s talk about what clients of a retainer-based firm can expect.
Eliminating Conflicts of Interest
With retainer-based financial planning, the client pays an upfront sum for services rendered over a specified time period to eliminate conflicts. In contrast, commission-based planning and assets under management (AUM) fee structures come with obvious conflicts of interest.
For example, a client may seek advice about when to place a business on the market. Commission-based advisors may have a vested interest in seeing the sale completed sooner so they can sell more products. Likewise, an advisor compensated through the AUM model has a conflict because selling the business sooner gets the proceeds under management faster. With retainer-based compensation, the timing of the sale remains fee-neutral.
Conflict can also arise under an AUM fee structure, even when it is not there. For example, an AUM-based advisor may caution against a potential investment property purchase that would reduce AUM. They may rightly believe the property is overpriced. The advisor may then point to a basket of well-diversified, high-yielding real estate investment trusts (REITs) as a more profitable and less risky way to invest in real estate. However, it could appear to the client that the REITs are recommended to maintain a higher AUM.
When advisors work in accordance to a retainer-based fee model, it reduces the chances of a conflict of interest. In this example, the advisor’s compensation remains identical whether the client opts to buy the investment property, invest in REITs or partake in a completely different investment.