Flat fees gain traction among advisers critical of asset-based pricing

Nothing rattles the cage of the wealth management industry quite like a debate over fees, particularly if the discussion promotes a move away from the golden goose of asset-based pricing.

There are pockets of the financial advisory space that, for whatever reason, are boldly pushing against the popular model of asset-based fees in favor of flat fee models.

Andy Panko, founder of Tenon Financial, launched his firm less than three years ago by looking at the financial advisory space from the consumer’s perspective. Even though he has adjusted his fees twice to find the right balance, he believes the flat fee model makes the most sense for clients and the wealth management industry.

“I never understood charging based on assets; it doesn’t seem sensible,” Panko said.

Whether charging based on assets is sensible or not, it is the dominant fee model used across the financial planning industry. According to data compiled by InvestmentNews, more than 90% of advisers employ some form of asset-based pricing.

Commissions, an old-school and shrinking fee model, are charged by more than 37% of advisers, followed by flat fees, which are used by about 26% of advisers.

A lot of advisers employ multiple fee models, but purists like Panko believe in keeping it simple.

He charges an annual fee of $8,400 for individuals and $9,600 for couples. Panko primarily works with clients in or near retirement who fit into a slot of being neither rich nor poor.

“My model indirectly rules out people with lots of assets and people with a small amount of assets,” he said. “I generally draw the line at $10 million portfolios, because at some level the assets do matter."

While Panko does portfolio management and tax planning for his clients, he recognizes his limits, which is why he doesn’t work with business owners, international clients or special needs clients.

Lisa Kirchenbauer, founder and president of Omega Wealth Management, has been charging clients a flat fee for planning services since 2004.

Her annual fees range from a minimum of $8,000 up to $40,000, depending on the complexity of the client, but she also offers a modest asset-based fee for clients who want their portfolios managed.

Kirchenbauer gradually transitioned away from commissions almost two decades ago when she started to offer a mix of flat fees, asset-based fees and commissions.

“For some clients, the fees ended up being less, and for some it was the same but structured differently,” she said.

Sara Grillo, an industry marketing consultant who has become a vocal supporter of flat fees, said the fee model is becoming the latest way to express added value.

“It’s not the fee as much as how the fee is communicated,” she said. “A flat fee is beneficial for a client with a larger portfolio that might be sick of having the fee vary every year, and it is a much more transparent model.”

Grillo said the prospect of stating the fee upfront in actual dollars, as opposed to as a percentage of assets, is what prevents some advisers from migrating away from asset-based pricing — that and the fact that asset-based pricing typically equates to more revenue.

“With a flat fee, you can’t get away with the fee being invisible, and I believe those [flat fee] advisers are better for that because it manifests itself toward a higher level of communication with the client,” she said. “With the up-and-coming generation, there is fee compression, because they are tech savvy and they’re not paying for the traditional sales pitch. It’s going to force the industry to align its values with the price it's charging.”

Dick Power, founder of Power Plans, has been charging a flat fee for almost 30 years, but eventually added an asset-based option for clients who also want portfolio management.

“My philosophy is that financial planning is much more than just investment management,” he said. “One major advantage of the flat fee is that it embraces the fact that most financial planning services in particular have nothing to do with investment management, and there is often also a need for investment advice for accounts that cannot be rolled over, such as 401(k) accounts.”

Like Panko, Cody Garrett, founder of Measure Twice Financial, has discovered that the flat fee model appeals to clients who like to do a lot of their own investing, but need direction with the financial planning part.

Garrett’s model is a straightforward $6,400 per household for a three-month relationship that includes three meetings.

“It all comes down to who you serve, and I serve mostly DIY investors, and most of them want to leave their asset-based adviser,” he said. “I believe the comprehensive planning part is the most important part.”

Garrett limits himself to working with just 22 clients per year, and he said he currently has an 18-month waiting list. “Right now, demand for flat-fee advisers exceeds supply,” he said.

Panko, who has 40 clients, is also bumping up against his capacity limits.

Two years ago, when he was charging $6,000 for individuals and $7,200 for couples, he was attracting so many clients he assumed his fees were too low. He raised them to $7,200 for individuals and $8,400 for couples and the clients kept coming.

“I have a hard cap at 50 clients,” Panko said. “I’m a solo practitioner and I want to stay that way.”

Of course, there are a lot of reasons asset-based pricing continues to dominate the financial advisory space.

Mark Rylance, president of RS Crum Inc., said his firm switched from flat fees to asset-based fees about a decade ago largely because it was a constant headache to calculate and adjust fees.

“The primary reason we switched back to an AUM fee was not to make more money, although that has been the case, but rather to get out of the cycle of having to continually adjust retainer fees up and down,” he said. “It was really a pain.”

Even though the firm converted to asset-based pricing, Rylance said about half the clients are still on the flat fee system.

“Clients end up better off with a flat retainer fee because advisers don’t raise fees when they should,” he said. “When we started implementing retainer fees with a cost-of-living adjustment, you would get real strange fees that were not round numbers. Percentage of assets is our preferred method at this point.”

While asset-based pricing has inertia on its side, Grillo believes flat fee models are gaining momentum.

“I think what you’ll see is more advisers offering flat fees as a side option,” she said. “The competition, in the form of the invisible hand, will show the best value for the lowest price is flat fees.”

For all the arguments in favor of asset-based fees that cite advisers’ fees adjusting with client account balances, Grillo acknowledged it will take a lot to move most advisers away from such a lucrative fee model.

“Nobody is going to wake up and say, 'I want to make half as much money this year,'” she said. “Flat fees are not going to be as popular with the more senior advisers, but it will be more popular with Gen Y and Gen X advisers.”