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Industry Spotlight > RIAs

Trendspotter: Advisor Fee Structures Are Shifting

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What You Need to Know

  • Advisor compensation structures are becoming more flexible.
  • More than 95% of SEC-registered advisors offer asset-based fees.
  • Advisors may offer performance fees only to clients who have assets or net worth above a specified amount.

The Trend

Advisor compensation structures are becoming more flexible. The Investment Adviser Association’s 2021 industry snapshot found that over the past couple of decades, advisors have become more likely to offer fixed fees and hourly fees in addition to asset-based fees.

Nearly all SEC-registered advisors (95.5%) offer asset-based fees, IAA’s 2021 report found.

These fees are structured as a percentage of client assets under management. But only 17.4% of advisors offer asset-based fees alone. Most advisors offer asset-based fees along with other types of fees, such as fixed fees, performance fees and hourly charges.

Most commonly, IAA reported, advisors offer both an asset-based fee and a performance fee; 24.5% of advisors offer only these two fees. Only 4.5% of advisors do not offer an asset-based fee. About half of these advisors include a fixed fee as one of their fee offerings.

Over the past two decades, IAA’s report states, asset-based fees have become more common (+9.6%), while transaction-based fees (commissions) have become less common (-8.3%). In 2020, only 2.6% of advisors charged commissions. Advisors must be dually registered with a brokerage firm or sell insurance products such as fixed annuities to offer commissions as a fee option.

Compared with advisors 20 years ago, advisors in 2020 were significantly more likely to offer performance fees and fixed fees. Advisors may offer performance fees only to “qualified clients” who have assets or net worth above a specified threshold.

The Drivers

  • Advisor compensation structures align advisor interests with client interests.
  • Clients are seeking more holistic fiduciary advice.
  • Regulations have been put in place to rein in high fees.
  • New technology is helping to support advisors’ business.
  • Advisor business models are changing.

The Buzz

Michael Kitces, head of planning strategy for Buckingham Wealth Partners and co-founder of XY Planning Network:

“Indeed, the rise of monthly subscription and other similar fixed-fee models continues to accelerate. We see it directly in the rapid growth of AdvicePay, which was built specifically to facilitate monthly subscription, hourly, and other fee-for-service financial planning business models. The total amount of fixed advice fees that AdvicePay processed in June was up 93% from June of 2020, which itself was up 114% from June of 2019.

“Similarly, XY Planning Network has grown so rapidly that it is about to cross 1,500 advisors utilizing various fee-for-service business models, across nearly 1,200 firms. Notably, according to NASAA’s own report, there are 11,342 state RIAs offering financial planning services. Which means in barely seven years, XYPN alone has grown to more than 10% of all state RIAs offering these new business models.”

The growth of fee-for-service is not a function of the “‘changing needs of the client.’ The issue is simply that the AUM model only fits one kind of very narrow target client – someone who has accumulated significant assets, in a liquid portfolio, and who is willing and able to delegate the management of those assets to an advisor. As we’ve shown in our prior Kitces analyses – in particular – that market is less than 10% of all households. In other words, the AUM model is a niche that serves one particular type of clientele. The growth of fee-for-service is about advisors realizing that there are far more clients to be served than just those who already have accumulated significant investable assets.”

Karen Barr, president and CEO, Investment Adviser Association:

“Over the past decade, advisor compensation has evolved to become more flexible and even more aligned with client interests. Today, advisors offer different combinations of fees tailored to meet client needs. Clients have been seeking more holistic fiduciary advice in addition to investment management, including financial planning. That has led to more firms offering fee arrangements that do not focus solely on the portfolio management aspect of advice. This same trend toward recognition of the value of fiduciary advice has led to a significant decrease in the number of firms charging transaction-based fees.”

Hank Sanchez, a Bates Compliance managing director at Bates Group:

“Yes, I have seen this trend. It has been spurred by (1) the overall regulatory environment to address high fees, to lower fees for investors and increase fee transparency; (2) advisors’ ability to utilize more technology in their business and to leverage the technology to better serve clients.

“With the ability of advisors to employ technology to support their business, they are able to grow their business and keep their fees lower. The technology allows them to do things such as employ robo-systems to execute trades, or to engage firms that use account trading and monitoring systems. These systems allow advisors to move away from Excel spreadsheets, and pencil and paper, to monitor accounts and to obtain automated performance reports. This, in turn, frees up time to grow their client base.”