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AUM, Hourly or Retainer Fees: Which Model Is Best for Advisors?

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What You Need to Know

  • No single fee model fits every advisor and client.
  • Asset management costs have shrunk more than advisor fees, says Penny Phillips of Journey Strategic Wealth.
  • Some firms are overcharging clients.

A lot has been said in recent years about fee compression and new fee models for investment advisors, but not every fee model works for every RIA firm and every client, according to the founders of three RIA firms who spoke Wednesday in an online “Discussion on RIA Fee Practices and Trends.”

“I’ve always been a stickler on fees of all types,” including mutual fund fees, where some firms “charge way too much money for what they do,” said Rick Ferri, CEO and founder of Ferri Investment Solutions in Georgetown, Texas.

(Related: Rick Ferri, Back in Business, Drops Bomb on AUM Fee Model)

He started the firm in 2019. For a flat $925 fee, he helps clients set up a portfolio, he explained, noting he then charges an hourly fee if they need more help.

A portfolio with index funds “outperforms 95% of all other strategies,” so he is strongly in favor of his clients having an “all index fund portfolio,” he said.

The average client does not need a financial plan every year, so a charge of $2,500 to set up the plan and then $1,000 a year for advice if the client has $1 million in assets seems to be a fair fee structure, he said.

So why, he asked, do typical advisors charge a 1% fee that comes out to $10,000 a year? How can they charge that much money and “call themselves a fiduciary at the same time? It just strikes me as being a little bit hypocritical,” he argued.

Although Ferri has experience with the various fee models, the hourly fee model is “clearly the most fair” because 90% of the charge should be based on the amount of time dealing with the client directly, he said.

“I can’t imagine anything being more fair than that,” he explained. “As a fiduciary, my role is to ensure that the clients are paying fair fees, and everything that I do based on the amount of my time and the amount of effort I have to put forward with the client and an hourly model is just about the fairest you can get.”

An advisor must be paid a fair wage — “you need to make a living, and you should make a very good living,” he said. “$150,000 to $250,000 is a fair [annual] wage for an advisor if they’re really advising. It aligns very well with the hourly model.”

AUM Fee Pros and Cons

However, Penny Phillips, president and co-founder of Journey Strategic Wealth in Summit, New Jersey, said: “I don’t love the hourly fee structure” because it is difficult for an advisor actually providing financial guidance and meeting with clients by phone and in person to fairly capture the amount of work you are actually putting in with that model.

But it depends on the business, she said.

Ferri said that he had used a fee structure based on assets under management at a former business. “When you’re doing AUM, you can build assets under management and you can create wealth in the business,” he said. “You can sell that.”

Phillips and Anna N’Jie-Konte, founder of Dare to Dream Financial Planning in Silver Spring, Maryland, agreed with Ferri that some firms overcharge their clients.

Wirehouses don’t even want to deal with clients under a certain asset level, and many clients are being overcharged by those firms and would have a better experience even on Charles Schwab’s robo-platform, according to Phillips.

“I do think there are a lot of problematic practices in the industry,” N’Jie-Konte agreed. “There’s a whole slew of folks who are charging 2% and don’t ever worry about whether they talked to [a client] that year,” she said.

The Retainer Fee Model

N’Jie-Konte’s firm focuses on women of color in their 30s and 40s who are high earners or business owners. It charges a “fee-only retainer model” for most clients, charging $1,200 up front to start the financial planning process and the retainer fee on a monthly basis, she explained. For clients who prefer to be charged based on AUM, she charges a modest fee, she said.

“I’m very pro-passive investing,” like Ferri, N’Jie-Konte said. Although some firms’ fees “can be excessive,” she said, much depends on the demographic being served and whether clients need a financial plan or not.

N’Jie-Konte is dealing with clients in a period in their lives where they tend to need “ongoing support” from an advisor because many are getting married, buying homes or having kids, she noted. That is much different from clients who are retirees and tend to need less regular financial advice, she said.

A Fee ‘Misconception’

For advisors thinking about refining their fee structures, Phillips offered advice. First, “price is only an issue in the absence of value,” she said. “I’ve seen advisors charge in a million different ways. Although the advisory fee model is still the leading way to get paid for what you do as an advisor, it doesn’t mean it’s the best way or the only way.”

Meanwhile, “there is a misconception about fees in the business — that fees have compressed and advisors need to be concerned,” she explained. “The truth is, asset management costs have compressed. Advisor fees broadly across the industry have not compressed, meaning advisors are still able to charge — let’s just call it the 1% on a million [dollars in client assets] and have that be the standard for them in their business.”

What she sees as the “biggest challenge with getting a client to pay the fee” is that the “terms wealth management and investment management are synonymous in our business” now.

The wirehouses have traditionally claimed they do wealth management and planning, “when really all they do, or did, rather was one small sleeve of that investment management,” she explained. For that, they’ve charged clients 1.5% or even 2% and called it wealth management. Then along came the robo-advisors and digital service providers, and “all of a sudden, clients realized ‘I can pay a subscription fee or 10 basis points for the same experience.’”

Those advisors who are “really delivering wealth management, who are really delivering advice on an ongoing basis, I think have every right to and should be charging a fee for investment management and whatever it costs them to oversee the institutional portfolio management and then a fee for the advice and guidance that they deliver on an ongoing basis,” she said.

Her firm’s advisors charge a planning fee that is usually between $3,000 and $7,500, she said, noting the advisors are engaging at least twice a month with ultra-high-net-worth clients who have multiple businesses. The firm, however, also uses an advisory fee grid ranging from 70 basis points to 125 basis points on smaller accounts, she said.

The firm also offers a subscription-based model to some clients because it encourages advisors to work with the next generation of current clients and bring on new clients who “have traditionally not had access to quality advice in our business and allow clients to pay for that in a way that makes sense for them,” she explained.

Pictured: Dare to Dream Financial Planning founder Anna N’Jie-Konte.