The bedrock advisory payment model of charging a percentage of assets under management, seems to be loosening its stranglehold.
AUM isn’t about to disappear, but it is giving way to alternative models tailored to younger investors with lower asset levels.
A recent survey of 956 advisor responses found that 87.7 percent of advisors used AUM as part of their fee structure, 43.7 percent used retainers as part of their fee structure and 26.6 percent used hourly fees as part of their fee structure.
“Whereas five years ago, the AUM-only category would almost certainly have been over 70 percent, today it represents almost exactly one-third of the respondents,” wrote Bob Veres, author and publisher of the 2017 Inside Information AUM/fees Survey.
“More than 85 percent of the respondents still charge some form of AUM, but just under two-thirds are now supplementing AUM fees with retainer or hourly (and some commission) revenues.”
Other fee structures muscling in on AUM-only is healthy and helps attract younger investors, said Matthew Jackson, a consultant with the strategy and marketing firm Simon Kucher & Partners.
“AUM makes [advisors] focus on the affluent, but what of the other 90 percent? They have needs and they have money to pay for those needs as well,” said Jackson, co-author with Wei Ke of the report, “The Future of Fees.”
The Achilles heel of the AUM model has always been that the amount paid to the advisor has had little or no bearing on the value delivered by the advisor.
Charging a 1 percent fee on $1 million in assets generates $10,000 for the advisor, while charging a 1 percent fee on $100,000 in assets generates $1,000 for the advisor.
Did the advisor do 10 times the work for the former client than for the latter? Not likely, industry analysts said.
Will an advisor who charges 1 percent chase a client with $1 million in assets over one with $100,000? Almost certainly.
Small advisories, not the billion-dollar midsize firms and multibillion-dollar registered investment advisory behemoths, are leading the hunt in the diversification of fee-based models, Jackson said.
THE HOURLY MODEL
Enter the likes of Mark Berg, an advisor with Timothy Financial Counsel in Wheaton, Ill., who swears by paying only for time used.
Berg is unusual among fee-only financial firms in that Timothy Financial provides hourly advice, with overall costs falling into a window depending on the level of planning.
Young “Next Gen” clients are charged the hourly rate of $220, or the equivalent of $1,200 to $4,300 for a basic plan.
A follow-up question that requires five minutes of Timothy Financial’s time incurs a pro-rated fee based on the five minutes.
Mid-level “Level Three” clients are charged an hourly rate of $280, or between $4,200 and $8,400, for anywhere from 15 and 30 hours of work.
Clients with complex insurance and estate planning needs pay $400 an hour for 40 hours or more, which comes to $16,000 or more for a “Level 5” plan, according to the advisor’s website.
A target AUM becomes irrelevant under this time-based model.
“It’s a textbook blue ocean strategy,” Berg said. “We’re filling a need that others right now are choosing not to serve.”
Target client: Clients with a net worth of $1,000 to tens of millions of dollars.
A THREE-PART MIX OF FEE AND AUM
Beth Jones, founder of the fee-only registered investment advisor Third Eye Associates with offices in Red Hook, N.Y., New York City and Washington, D.C., links her fee with a corresponding service, which helps clients see what they are paying for.
“It’s about how you present it to the client — I never talk about the money until I’ve talked about the value and what it includes,” she said.
Third Eye invites clients to choose between bronze (13 service hours), silver (19 service hours), gold (27 service hours) and platinum (41 hours) plans that offer gradations of service and service hours.
A fixed fee for the basic bronze plan runs $2,500, for the comprehensive individual silver plan $3,500, for a couples’ gold plan $4,000 and for a platinum plan suitable for a business $5,000.
In addition to the base package, beginning with Year Two, clients buy ongoing maintenance costs at a fixed price, an hourly rate or as a percentage based on AUM.
A bronze plan client with few assets or short-term needs might be charged an extra $1,500 a year, or $200 an hour for ongoing maintenance.
Ongoing maintenance for the gold plan couple comes as a percentage of assets for investment management, and for a platinum plan maintenance Third Eye charges on a standard sliding scale based on percentage of AUM.
Investment management can be dropped for clients interested in planning only.
The flexible ongoing support pricing structure serves the client and the advisor since the revenue model does not hinge entirely upon AUM.
A client with no liquid assets can still become a client, widening the reach of the firm.
Jones retains the AUM model since “nothing makes money like an AUM fee,” but the goal is to attract clients — 40-somethings with a 401(k) — who can’t bring assets to the firm just yet but will do so one day.
Target client: affluent middle Americans with $500,000 to $2 million in assets.
Carolyn McClanahan of Life Planning Partners in Jacksonville, Fla., charges a recurring flat fee with no AUM component.
Fees vary from one client to another based on complexity.
The minimum fee is $10,000, but that buys a full-service model that encompasses investment management, follow-up and implementation.
Life Planning Partners sets the base at $5,000 but the average fee is closer to $17,000 and clients who don’t qualify for the $10,000 minimum are referred out.
McClanahan, a former doctor, offers health care and aging planning in addition to cash flow projection and tax planning.
“I had many doctor clients — some had a lot of money, and some didn’t,” she said. “The fees were very disparate between them, and it didn’t feel right.”
When assets move past the $2 million threshold, charging a fixed fee starts to become cheaper than the AUM model. Life Planning Partners is now acquiring clients in the $10 million to $30 million asset range.
Target client: the “millionaire next door” with $2 million to $10 million in net worth.
THE MCDONALD’S MENU
Bill Simonet of Simonet Financial Group in Kyle, Texas, prefers the choice-based model with a high-touch financial advice framework.
Needs-based financial planning packages with bundled service hours come in four flavors: fundamentals, standard, premium and premier, this last priced from $5,500 to $14,500 for 20 or more hours of financial planning annually.
Investment management comes separate from the planning menu and Simonet charges a “preferred” fee schedule of 0.95 percent of assets for up to $1 million in household assets to 0.55 percent of assets for $5 million or more.
A “standard” investment management fee scheduled is a bit more expensive for household assets up to $3 million.
The four planning options reflect the gradually widening scope of the planning service.
The “wealth planner fundamentals” menu includes one planning meeting with a personalized plan and monthly updates, as well as an additional five hours of financial planning a year.
Fundamentals includes a financial position statement, cash flow planning, financial risk management and employment benefits review for an annual fee of $2,400.
The investment fee schedule for accounts managed directly are priced at the preferred rate.
A “wealth planner standard” menu covers two planning meetings a year, more comprehensive planning that includes education, retirement and basic estate planning, as well as 10 hours of financial service for an annual price of $3,000.
Investment fees also are priced at a preferred rate.
“Wealth planner premium” entails four planning meetings a year, 15 hours of annual advice and an “advanced” planning approach covering tax and investment planning, special needs care and small business retirement strategies. The premium option sells for $3,600 annually.
Simonet’s metaphor is one with which many people are familiar when choosing a cell phone plan or a car with interior trim levels and engine options.
“I want you to pick up the phone and call me if you have questions,” he said. “If you’re looking at buying a car, ask me about interest rates. How much do I put down? How much of the car can I afford?”
Clients are alerted when they approach their allowable maximum under their plan to consider moving up a package – not unlike using data in a cell phone plan.
Target client: Young professionals, working Americans saving for college, affluent and high net worth
THE ‘GEN X’ MODEL
Jude Boudreaux of Upperline Financial in New Orleans knows that AUM doesn’t work for clients with illiquid assets of less than $1 million. But many clients generate liquid incomes and still need advice.
Instead of charging a fixed fee based on a percentage of AUM, he uses two alternatives for financial planning: a 1 percent fee generated from a client’s monthly income and a 0.5 percent fee generated from a client’s net worth.
For consulting, he charges between $75 and $250 an hour.
When clients are young and own a very small asset base, the income-based fee dominates.
A new college graduate bringing home $3,000 a month in salary might be charged $300 a month, for example.
As clients age, the net worth-based fee rises over time with assets.
The 1 percent fee of monthly income and the 0.5 percent fee from net worth isn’t set in stone as other factors like future earnings potential, number of accounts, and the client “engagement” factor may tilt the fee structure a bit.
“We want to have flexibility,” Boudreaux said. “There is no magic number.”
Young professionals who have assets but who also carry a lot of debt are candidates for Upperline because these clients, while they often don’t meet minimum investable thresholds now, exhibit growth potential long into the future.
Target client: HENRY, or high earning, not rich yet.
SEGMENTATION BY PERSONALITY
Michael Solari, owner of Solari Financial in Bedford, N.H., built his pricing model based on the engagement level of the client based on the delegator, the collaborator or the do-it-yourselfer, or DIYer, archetypes.
Delegators, who are happy to let Solari manage their money, pay an upfront fee for the plan and an ongoing fee for advice and investment management.
Collaborators, who prefer maintaining a continuous relationship but want to retain financial decisions on trades and plan execution, pay an upfront fee and an ongoing fee for advice — but not investment management.
DIYers pay an upfront fee for the plan and an hourly fee for on-demand service.
“You should segment clients by personality and not just assets,” said Solari, a member of the XY Planning Network.
The ongoing fee is higher for delegators and collaborators, but the upfront fee is higher for DIY clients.
For Solari, charging a client twice as much for the same service because that client has double the assets of another client makes no sense.
Target client: Gen Xers, Gen Yers, DIYers.
Advisor Steve Lockshin of AdvicePeriod in Los Angeles keeps it simple. He offers advice and collects a check. Period. Clients might even get discount for placing assets on the automated platform.
There are no overarching AUM fees, no investment management fee, no subscription fees or percent of income calculations.
Of course, Lockshin’s clientele tends to be among the ultrahigh net worth (UHNW) segment where tax issues and specialist needs rank highest.
That intersection of his acquired experience around legal and tax issues enables him to deliver a “lateral approach” that focused and siloed lawyers and accountants simply can’t match, Jackson said.
Rather than applying a rigid basis point charge to part or all of the $100 million net worth, the fee might come somewhere between $100,000 and $350,000 to cover trust and estate planning, retirement planning, cash flow management, portfolio tax minimization, risk management and philanthropy.
While AUM does play a role, for the bulk of the book of business it is a “walk-on” role and caps are applied to each asset segment.
Even a fee of as low as $1,000 was profitable for this advisor.
Standalone investment management services for clients in the accumulation phase and with less than $10 million in investable assets pay 0.95 percent of assets under management, according to AdvicePeriod’s website.
Target client: UHNW or ultrahigh net worth client with $50 million or more in net worth.