C
harging fees based on assets under management has served the financial planning industry well for the past few decades. But the modern financial advice business is starting to cut varied paths toward different pricing models that might be better both for clients and the overall industry.
There is no denying the advantages of asset-based pricing, especially when compared with commissions, as a means of aligning the interests of advisers with those of their clients.
Hats off to all those advisers who have thrived under a fee structure that goes up and down with portfolio performance. In addition to illustrating how it puts clients and advisers on the same side of the table, a fee tied to an investment portfolio also avoids the awkward matter of having to send clients a bill for services.
For those registered investment advisers that have ridden the asset-based pricing model wave to build billion-dollar firms, there is probably no reason to change course.
(More:
Why the AUM fee model is so dominant)
But for everyone else, including the generation of advisers just getting their feet wet in the industry, alternative fee models are your future.
It is not just an ironic coincidence that one of the founders of the XY Planning Network, which strongly encourages retainer-fee pricing, is also doggedly committed to sticking with asset-based pricing for his own clients at the $1.8 billion Pinnacle Advisory Group.
Michael Kitces, partner and director of wealth management at Pinnacle, isn't talking out of both sides of his mouth when he preaches retainer fees for younger advisers but subscribes to asset-based fees for his own clients.
What Mr. Kitces is doing is envisioning the future of financial advice as much more inclusive and expansive.
He knows that veteran advisers like himself are all "fighting for the same 7 million high-net-worth households." But, he says, the future of financial planning is the untapped market that can be reached by advisers helping less-wealthy clients manage debt and save money.
As
InvestmentNews detailed in
last week's cover story, even though asset-based pricing is the
fee model of choice for nearly 90% of RIAs, there are lots of reasons to consider charging retainer, hourly or even single-project fees.
Some advisers are even adopting fee structures modeled on the McDonald's menu format, allowing clients to select the type and level of planning services they want to purchase.
As popular and utilitarian as the asset-based model is, it has its shortcomings, not the least of which is that it places an emphasis on investment management at a time when most advisers should be presenting themselves as holistic planners.
Digital advice platforms that manage portfolios for 25 basis points are often blamed for putting downward pressure on advisory fees. Although there is scant evidence of advisory fees dropping, the robo-platforms are driving an increased focus on fee transparency.
One part of this discussion, which typically lingers more within the advisory space than it does among clients, is the matter of which fee model is the least conflicted.
Despite what some might argue, no conflict-free fee model exists, which means there is no perfect fee model. But because nobody expects advisers to work for free, it makes sense to embrace a pricing model that is straightforward enough that clients understand how much they're paying and what they're getting for that fee.
Over the past few decades, the advice industry thought it had answered that question with asset-based pricing. But like the commission-based brokers before them, the market is heading in a new direction.
Whereas the financial advice industry of old was always focused on those investors with enough assets to manage, the future places less emphasis on the assets and more on the planning, which is where the real opportunity lies.
