The emergence of multiple fee structures happened enough years ago that some advisors are weighing in on their experiences with it. The first reviews are not so good. The idea sounded great at the time and these advisors even had great success explaining it to their clients and getting their clients to buy in. So what happened? Should you throw the whole idea out based on this one report?
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According to one advisor, the problem lay with the separation of services. It made sense to clients to charge one fee for asset management (AUM) and another, flat fee for financial planning. In this particular case, the AUM fees were adjusted downward so that the total fees, AUM plus flat fees for financial planning, ended up being about the same as the original AUM fees.
So, when the markets took a dive during the recession, clients became reluctant to continue paying the flat fees. Since the AUM fees suffered along with the value of the actual assets, clients felt advisors were right in there, suffering with them.
But the flat fees ceased representing any value because the financial planning part of the equation was done on the front end. In one case, clients simply stopped paying the flat fees and left the advisor with the now diminished AUM fees. In another, some clients simply left to go to another advisor.
What’s the real takeaway from this? That advisors should stop trying to get paid for the advice they give and acquiesce to the gyrations of their incomes along with the volatility of the capital markets? Hardly. Granted, changing your fee structure needs to be carefully weighed in the context of the nature of your practice, your relationships with your clients, and your team’s conglomerate goals for your advisory business as well as your own personal goals.
But here’s the real issue. Clients either stopped paying the flat fee or left because they no longer saw the value of paying it. This means the advisors charging the fees also did not see the value of it. If we want to get paid for advice and not just as a result of doing a transaction or selling a product, then we have to value our own advice consistently and to the point where clients will value it, too.
And whether we like it or not, an all-encompassing AUM compensation is still primarily based on product sales and transactions. Even so, we should not devalue the work
we do on that side of the equation. It’s important work and diminishing the value of this service also diminishes our value in our clients’ eyes.
Financial planning and consulting each involve more than a front-end piece of work. Financial plans and consulting projects should be reviewed regularly and tweaked based on life circumstances and the family dynamics at work. You have the opportunity here to build much closer relationships with your clients if you remain proactive on the flat free front. If you truly earn that flat fee every single day, clients will see the value of it and will continue to pay it.
The advisor who reviewed the dual compensation structure pointed out that caution should be taken when contemplating a change. That is the most important point the advisor makes. In that light, educate your clients about what they are truly getting for those flat fees or retainer fees every single day. While you're at it, you might also want to reeducate them on the value represented in AUM fees.
Either way, if you raise your fees or change your fee structure, you have to raise the value of your services along with it. Regardless of how you are compensated, no one will see your value unless you show it to them.