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.
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.
- 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.
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.