The COVID-19 pandemic may be the catalyst for the biggest change in advisor compensation since the trend in AUM-based compensation accelerated about 20 years ago.
According to a new report from the Aite Group, the current crisis may force advisors to shift from a focus on AUM-based compensation to one that also includes advice-based compensation.
That would more closely align compensation with the services that advisors provide such as planning, college savings, health care, debt consolidation and budgeting, and somewhat insulate volatility in compensation from the vagaries of the market.
The new types of advice-based compensation could include flat fees and/or subscription-based or retainer fees.
“The COVID-19 financial crisis may have the greatest impact on advisor compensation moving forward,” according to the Aite report. “While AUM-based fees are still a core driver of compensation, many advisors will need to examine alternatives to unbundling advisory fees and consider lowering or eliminate their advisory fees and adopting advice-based compensation.”
Aite’s latest analysis includes a survey of advisors conducted in spring 2019 before the current pandemic.
Failing to do so risks losing clients, says Wally Okby, senior at analyst at Aite and the lead author of the firm’s report. “At the end of the day the client needs to see they’re getting value in what they’re paying for,” Okby tells ThinkAdvisor.
“If clients perceive they’re paying higher fees to someone who isn’t doing anything other than keeping their funds in model portfolios they’re going to ask, ‘why do this?’ ” he asked.