The Powerful Evolution in Fee Structures
Some years ago, in the very early 1990s, I made a bold prediction. In my magazine columns and in my Inside Information newsletter, I predicted that the commission-based revenue model was in the process of exiting the financial planning/financial services world. Before long, I said, commissions would be replaced by fees paid by clients directly to their advisors.
Going further, I bravely predicted that the still-very-new AUM revenue model, where advisors and planners charged their clients a percentage of the client’s investible assets, would become the mainstream way to collect those fees.
At the time, I received no small amount of pushback from leading professionals, and volumes of what can only be described as ”hate mail” from professional salespeople. Simply writing those words threatened their comfortable livelihoods, and there was a widespread belief that, “people will simply not pay for financial planning advice.”
That long-ago prediction turned out better than a few of my others.
About 10 years ago, I sensed another change coming, and began to talk about a shift away from AUM to more direct-fee models: chiefly flat fee monthly or quarterly “retainers” like the revenue model that has long been used by members of the Society of Financial Services Professionals. However, this time I expected the profession to migrate to more diverse structures, recognizing that the Garrett Network advisors were charging hourly and project-based fees, and the founders of the XY Planning Network were starting to talk about monthly subscription-based fees for younger clients.
Once again, the response in the profession was less than enthusiastic.
I won’t labor over the arguments for these emerging fee models; you know them already. There are conflicts of interest built into the AUM model that don’t exist when clients are paying for planning advice directly. Not everybody wants to turn their investible assets over to a professional. The AUM model gives the impression that clients are paying for asset management (increasingly a commodity) rather than the financial planning advice (which has the potential to change lives). Advisors who are paid under AUM take a pay cut when the markets go down, precisely when they have to work harder to communicate with and reassure clients.
And most importantly, only people who have already accumulated $250,000 or $1 million or whatever minimum is set will be able to pay for planning services under an AUM model. It is an understatement to say that this is not the majority of the human population – and any aspiring profession needs to make itself available to all who need its services.
But however strong the argument, that more recent prediction of mine has not (another understatement) been vindicated in the marketplace.
Recently, I released a comprehensive fee survey that was designed to test what, exactly, is going on in the advisor marketplace – to assess whether firms are, indeed, migrating from the AUM revenue model to something that more closely matches time and internal costs with fees charged. A total of 1,037 advisors responded to my survey, including fee-only (68% of the sample), dually-registered (30%) and wirehouse (2%), also broken down by years of experience and the size of the firms they managed or worked at.
You can find the full survey, and download it for free, on my Inside Information website , but here I’d like to share some of the most surprising things I discovered.
First, I asked how much advisors were charging new clients for the initial financial plan. A surprising 48.51% of the respondents don’t charge anything at all for this laborious up-front process, and among those who did, the median initial fee was just $2,500-$3,000. It is clear that, for most advisory firms, the initial plan is a loss-leader, and the expectation is that this time and effort will be paid for over the life of the client relationship.
The survey breaks down the median fee based on years of experience, based on fee-only only or dually-registered, and the size of the firm from under $250,000 in annual revenues up to $5+ million in annual revenues. And there’s a big surprise in that data.
There was no surprise when I asked the respondents how they charge the majority of their best clients: 72.90% charge primarily AUM fees. I suspect this is lower than the 90+% who would have responded this way five years ago, but without more data I cannot triumphantly claim to have identified (much less accurately predicted) a trend. Breaking down these results by years of experience, business model and size of firm, I found that, in general, younger advisors and smaller firms were much more likely to primarily rely on flat monthly/quarterly retainers, hourly fees, or subscription fees than their more experienced counterparts and those at larger firms, who were more AUM-centric.
Things got more interesting when I asked if the survey participants have a different revenue model for some clients than others. Here, I could spot at least faint glimmers of a trend. Sit down and hold onto your hat when you read this: just 37.01% of the firms in the survey charge all of their clients AUM only. Almost as many (33.17%) charge some clients AUM, others flat monthly/quarterly fees. The next most popular response was AUM for some clients, hourly for others (13.41%). There followed a number of breakdown charts and tables showing preferences among different size firms and advisors of different experience levels, but once again you could see that younger advisors and smaller firms are more adventurous in their fee models. In that data, I see the outlines of a trend. Whatever the newer advisors are doing is likely to become the norm as they become mainstream members of the profession.
I also asked survey participants to tell me what an appropriate hourly fee would be for senior advisors and firm principals, and also for junior or associate advisors – even if they or their firm doesn’t charge that way. For senior advisors, the responses ranged from one advisor who estimates his/her time to be worth $25 an hour, all the way up to an individual who estimated his/her hourly value at $1,500. But the clusters tended to be around $250, $300, $400 and even $500 (a hefty 9.75% of the sample). For associate advisors, the responses clustered at $150, $175, $200 and $250. Once again, there is a real surprise (to me, at least) in the breakdown of advisory firms based on experience, business model and size of firm.
Finally, I asked about AUM fee structures, and then calculated (as I did for pretty much everything else you’ve read about so far) median fees, based on portfolio sizes ranging from $250,000 to $5 million. The surprising thing, at least to me, was not the fee levels, but the fact that only a small minority of the firms surveyed would turn away a prospect who had a mere $250,000 to invest. Minimum fees appear to be lower than what you read in the trade press.
If you download the report, you’ll find not just a lot of charts and graphs, breakdowns and spectra, but also my commentary on what I find interesting or unusual in this or that or some other illustration of the data. At the end, I can say that my prediction that AUM will eventually be a thing of the profession’s past is not yet confirmed in the marketplace. But there are hints that it soon will be. I hope you, reading this, will consider participating in my next survey, in the February/March 2021 time frame, where I’ll see if we can pick up any trends year-over-year.
There is a great deal of data, and I tried to make every data point as accessible and useful as possible, breaking them down into many readable charts, with commentary that explores what the data in the charts would seem to suggest about how your peers in our profession are paid for their many valuable services.
I hope you will share my gratitude for the people who took the time to fill out the survey, and for the sponsorship provided by E*TRADE Advisor Services on behalf of its custodial platform, and First Trust, on behalf of its investment options.
Let me wish you a pleasant journey through the 2020 Inside Information Fee Report, whether or not you eventually decide to validate my bold predictions.
Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.