Let’s talk about the one percent, shall we? It’s been a while since anyone brought it up.
Sorry, not that one percent. Not the one politicians rail against for holding almost a quarter of the nation’s wealth. Those folks are doing quite well, thank you very much, enjoying the bounty that comes with record-high stock prices and a Federal Reserve that won’t let them go lower.
No, we’re talking about the one percent that that one percent is paying their wealth managers to oversee their increasingly bountiful portfolios. Because even with break points above and below that 100 basis-point fee for assets under management (AUM), it still remains the industry benchmark – the index finger in the wind, if you will, indicating when wealth managers start that vital discussion regarding the value of their services.
Well, that metaphorical finger has been up in that very same place for a long, long time now, despite the fact that advisors are now being asked to do a whole lot more for their clients. Even the not-so filthy rich ones.
Sure, the AUM model seems fair when compared to the now-ridiculous commissions that dominated the financial world only a few decades ago. But estate planning takes time. So does researching, managing, and monitoring alternative assets.
And time, as has often and rightly been said, equals money. Time is the very thing financial advisors are being paid for. It’s not like your wealth manager is charging clients for raw materials or delivery. It’s all about the time they devote to clients and the literal finger clicks it takes to get them to retirement, or wherever it is they want to go.
So, with that in mind, is it finally time to give the finger – and not the index one – to the one-percent fee?
Robert Pearl, co-founder and wealth advisor at G&P Financial, offers clients a standard, tiered fee structure of 1.25 percent for assets under $1 million, one percent for assets between $1 million and $5 million, and 0.80 percent for assets over $5 million. Currently he does not foresee any changes to his pricing model. Nevertheless, he does anticipate offering more services at the same cost simply because the industry keeps trending that way.
“Many firms are already incorporating services like tax planning and preparation, estate planning, and, for higher-net-worth clients, even services such as bill payments. I believe the next phase in our industry will likely include life coaching services as part of the overall offering,” said Pearl.
Right now Pearl says he does not feel much pressure to reduce fees. In fact, as his client base nears capacity, he’s been contemplating raising fees for new clients. And for those seeking financial planning advice, but who don’t meet the asset minimums required to work with him directly, he is offering a subscription-based model for ongoing planning and guidance.
Jonathan Foster, president & CEO at Angeles Wealth Management, also lists a typical tiered billing schedule, starting at that fabled one percent for the first $2 million in advised assets and scaling down to as low as 50 basis points for assets over $25 million. And he agrees that the “headline” fee rate has dropped only modestly, but the services provided, and the cost thereof, have increased dramatically.
“Twenty-plus years ago, private client advisors could charge one percent per year to basically pick a basket of full-priced mutual funds. Now, advisors are expected to provide comprehensive wealth services for the same price – financial planning, after-tax management, asset allocation, manager research, philanthropy planning, estate and planning,”
Added Foster, “Looking into the future, I think traditional asset-management fees will continue to compress, with index funds charging near zero, customized indexing and tax loss harvesting indexing under 10 basis points, and active at 25 basis points or less. I cannot imagine anyone paying one percent per year for this in five years.”
The key to maintaining prices, according to Foster, is to provide clients with value.
“Are we providing great value to the family for what we charge? If not, it’s not sustainable,” said Foster.
That said, Zoltan Pongracz, private wealth advisor at Procyon Partners, is not sold on the idea that prices are being compressed, nor is he feeling much pressure to lower fees. He points to an AdvisorHub study showing that fees for clients with significant assets ticked up between 2020 and 2021 primarily because clients came to understand the value of the services they were receiving beyond portfolio management.
“Advisors focused solely on portfolios are commoditized and face fee pressure, but when you help clients live better lives through robust financial planning, fees become secondary. Many claim to offer financial planning, but executing it well is an entirely different game – it’s like comparing me to Michael Jordan because we both play basketball,” said Pongracz.
Pongracz adds that through Procyon Trust, their trust and estate vertical, they offer corporate trustee services for an additional fee. This ensures trust assets are managed impartially and in accordance with the trust document’s terms, offering continuity and expertise for beneficiaries.
“We feel we’re fairly compensated for these extra services,” said Pongracz. “Could we charge more, and would people pay it? Sure. But our aim is to remain middle-of-the-road on cost while delivering top-tier results and value.”
Taking a similar approach is John Mosher, partner at Unique Wealth, who says some of his firm’s clients compensate them with a consulting agreement for advice surrounding other issues like business succession planning, estate planning concepts, informal business valuations and many others. However, he adds that “most clients receive services like these as part of the value we deliver in their comprehensive planning experience.”
On the topic of charging for ancillary services, Jason Gordo, co-founder and president at Modern Wealth Management, says private placements can either be billed on a one-time basis or included in the advisory fee, depending on how much liquidity and control they retain.
“If there’s a high level of control and influence, it might be integrated into the overall advisory fee. Otherwise, a one-time billing structure could be more appropriate,” said Gordo.
Furthermore, he offers estate and tax planning as additional services and bills them separately from the core financial planning and portfolio management services.
“This allows clients to tailor their planning needs based on their unique estate planning requirements,” said Gordo.
Finally, Anders Jones, CEO & Co-Founder at Facet, takes things to a new level by offering, well, levels. The firm charges an annual membership fee separated into three tiers – $2,000, $3,000 and $6,000 – based on level of service and the extent to which they implement the advice they offer. Across all tiers they include investment management as part of the annual fee.
“We strongly believe that the commission- and AUM-based fee approaches create an inherent conflict of interest and do not put a client’s best interests first,” said Jones. “We believe that over time, the industry will shift to more transparent, flat, and hourly pricing, where clients understand exactly what they are paying for and exactly what they are getting.”
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