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May 27, 2021 at 09:29 AM
What You Need to Know
- Charging customers by the AUM model hit a speed bump in 2008-2009's bear market.
- What grew in popularity afterward was the use of the retainer fixed-based fee, or subscription, model.
- Today, this model could be the new disruptor, especially as the use of subscription-based services expands.
As advisors have moved more toward financial planning and away from investment management, the way they charge clients for their services has shifted.
Today, there are three primary ways independent financial advisors charge fees: a percentage of assets under management (AUM); flat fees for projects, like a one-time financial plan; and retainer-based fixed fees — or subscription fees — based on a client’s financial complexity.
What some firm owners may not fully appreciate, though, is that if you run a 100% AUM business, how you manage, grow and expand your business is vastly different from how you run a flat-fee or retainer-fixed fee business.
The reason is simple: In an AUM model, revenue is driven by the market, while in a fixed-fee model, revenue is driven by the firm. In other words, fixed fees are agreed to upfront and are often reviewed every year. In the AUM model, the markets are driving the average fee paid per client, and this is true for the entire lifetime of the client’s relationship to the firm.
How does running the business change depending on the fee model you use, given that one structure has a “third,” outside market driver in the relationship, and the fixed-fee retainer doesn’t? Let’s explore that further.
Fee Models & Business Management
Under the retainer fixed-fee model, pricing is not adjusted to the market as it is with the AUM model. As a result, the retainer fixed fee must be reviewed with clients each year.
The fixed fee can increase or decrease as clients’ personal situations evolve, or it can rise as the assets managed increase. Regardless, a conversation with clients about the fixed fee should take place annually.
Such pricing discussions rarely happen with the AUM model. The cost to clients fluctuates with the market’s movement, so what clients pay can change more rapidly.
That fluctuation, of course, means that firms running on an AUM model have an inherent anxiety built into them. Market fluctuations can dramatically impact firm revenue and profits, and that impact can happen in just one day.
