Is It Time to Disrupt Your Fee Model?

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.

This type of fluctuation isn’t experienced by firms that run on retainer fixed fees. As a result, an owner can manage their business with less stress. We often see that this stress reduction leads to better decisions about the business and its growth over the long term.

Changing Attitudes

According to our data, the retainer fixed-fee models grew most noticeably after 2009. However, the retainer fixed-fee model did not gain much adoption mainly because investors were not as comfortable with it then as they are now.

Today, we subscribe to almost all services. For entertainment and music, we have Netflix, HBO Max, Spotify and Apple Music. For food, there’s DoorDash.

Retainer-based fixed-fee services are not just popular — they are everywhere. In fact, we’re now at the point at which they’re expected. This is because of the bear market of 2008-2009. Since then, we’ve seen the services garner more (and rapidly increasing) popularity.

While we have not had a longer-term bear market since then, the pandemic has given us a glimpse into how attitudes have changed. During the pandemic, our company has seen that the financial advisory firms with higher growth and client retention rates are those using retainer fixed fees.

What does this all mean? With little resistance to retainer fixed fees (in contrast to AUM fees), there’s great opportunity for firms to expand services to advisory clients.

Investors have now embraced financial advice retainers, and in some cases are requesting them rather than AUM pricing. And with client retention rates for both models now tracking at the same pace, the industry has a new pricing model disrupter.

It reminds me of what happened to commission-based firms when AUM models first became popular.