Anderson also suggests framing the conversation as the evolution of a business model. “We’re going to graduate you to a new
level of service. The economy has changed. We’re changing alongside
that.” One advisor he knows uses Apple—which years ago had
one product: a computer—to illustrate enhancements to a service offering. Another advisor refers to advances in medical science. “Doctors did the best they could with the available resources and
knowledge they had at the time. But we know so much more today. The
offering has broadened and the way we charge has changed as a result.”
When advisor Matthew Boersen switched to a fee-only
model from a hybrid arrangement last year, he was surprised
at how tricky the conversation got—especially since most
of his clients’ expenses actually dropped fairly significantly
when Boersen moved them from fee-share mutual funds
to commission-free ETFs.
“When they get that invoice now, they
see a dollar figure instead of a percent-
age. Even though they knew in the back
of their mind that it was cheaper, they
see that hard number and they feel like
they’re paying a bill,” says Boersen, who
heads Straight Path Wealth Management
in Grand Rapids, Michigan. The 26-year-
old manages $18 million in assets. “The
change in psychology was surprising. It
puts pressure on the advisor to work hard
to justify that fee and provide value.”
Scott Stratton launched fee-only
Good Life Wealth Management in Dallas
in May because his previous employer
had a million dollar minimum that had forced him to turn
away friends and family who didn’t qualify.
“It was frustrating on a personal level,” says Stratton,
who manages just under $5 million in assets. “As a profes-
sion, we want to help bring people up—not just work with
those who are already well off. I wanted to help younger
investors achieve their first million, as I did in my 30s.”
At the new firm, Stratton has developed a two-part fee
structure. Clients with over $250,000 in investable assets pay
a 1% AUM fee. Those with less than $250,000 are charged a
monthly $99 retainer that they can pay by credit card or au-
tomatic monthly payments, or through account withdrawals.
“I think the retainer model is a great way to bring financial planning to a much larger market, although I still
consider it to be somewhat of an experiment,” he said. “I
want to reach that 90% of the population that isn’t currently being served by the RIA business.”
The AUM-only fee may have made sense years ago but
advisor Alan Moore, who co-founded the XY Planning
Network, says he is seeing a grassroots movement today
toward flat monthly fees for financial planning services. XY
Planning Network trains advisors on how to operate their
business using the retainer model.
Why? The AUM fee structure only works for clients who
have accumulated assets—a minority of consumers, according to Moore. The AUM also ties an advisor’s value strictly
to investment management. “By charging fees for financial
planning, clients see that they are paying for the valuable
service of financial planning instead of the planning fees being essentially hidden in the AUM fee,” he added.
Moreover, he said, many young advisors
don’t want to manage investments and
need a new business model that doesn’t
rely on asset management to charge clients. And flat monthly fees aren’t vulnerable to market fluctuations.
Finally, Moore observes: “Younger
clients are accustomed to paying for their
lives monthly so why wouldn’t they want
to pay their financial advisor monthly?
This is a fee structure that intuitively
makes sense to clients. The only folks
that think the monthly fee structure is
a bad one are other advisors that have
been charging quarterly AUM fees.”
Ten years out, Moore believes the
monthly retainer model will be the dominant fee arrangement
used to provide financial planning while AUM will become
a niche fee structure only used with high-net-worth clients.
Eric Chen, associate professor of business administration
at University of St. Joseph in West Hartford, Connecticut,
says consumers may one day gravitate toward an additional
option: hourly rates.
“Advisors do have a level of skill and experience. There’s
What They’re Saying
no reason they shouldn’t be paid like a lawyer or an accoun-
tant,” he said. “But no matter what, in order to sell this shift
in compensation, the client needs to accept that the advisor
is providing expertise and value. This value needs to be com-
municated with clarity, based in dollars and cents.”
Still, Chen added: “It’s taken this long for the AUM fee to be
accepted. This was supposed to be the solution to transactional
fees. Now you’re asking us to change that again? It’s going to
take some getting used to. It’s going to take some education.”
“Figure out your hourly value.
What am I worth? Am I getting
paid appropriately? Then
sit down and create a value
proposition: Here’s what I do.
Here’s my mission statement.
Here’s how I customize my
offering, depending on what
type client. This is specifically
what I do for you.”
—Frank Campanale, CEO and chairman,
Lebenthal Wealth Advisors