A member of Advisors4Advisors yesterday wrote in with a question about whether there is an industry standard on whether to charge a new client while his assets are being transferred. While there may indeed be FINRA rules on the matter, there probably are no rules about this for RIAs. Nor do professional certifications deal directly with such cases.
To provide an authoritative answer, I reached out to several practitioners and below are there answers. Please feel free to post a comment if you have anything to add to their answers. And if you are an A4A with a question about such professional practices, please feel free to send it in.
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I am an advisor with an AUM fee structure. I have a new client who currently has assets at several different wirehouses. It will take several weeks to a few months to transfer all the assets to my custodian.
My question is, how should I charge for my services during this transition period? I have heard three different ideas so far:
1) Don't charge, i.e. only charge starting when assets show up at custodian.
2) Charge full AUM at the time when the contract is signed.
3) Bill an hourly rate during the transition and AUM billing after assets are transferred to new custodian.
Is there an industry standard practice around billing during transitions?
Thank you for any insight you can provide.
Answers From Advisors
Clark M. Blackman II, MA, CFA, CFP, CPA/PFS, CIMA
Accredited Investment Fiduciary
While it may be standard in the B/D world to base everything off of assets received and "In-house," this makes little sense to a fee-only RIA that may or may not even require that a specific custodian be used.
Clearly, much work must be done for a new client before assets are invested if an advisor is doing the upfront analysis and other work required to create an investment policy statement and allocation strategy that fits the client's risk return profile. This should be done as quickly as possible to facilitate the investing of assets once received, so it is highly likely that much work can be done before any assets are transferred.
As a result, it is entirely appropriate for an advisor to bill a client for work done, regardless of when assets actually get transferred to a custodian that the RIA requires or recommends. Charging an hourly fee may be appropriate; however, such a method of billing should first be disclosed in the firm's Form ADV. Billing rates must be disclosed and consistent when applied. Obviously, this fee must also be clearly explained in the advisory agreement signed by the client.
I find it preferable to charge the firm's standard AUM fee rate on the value of assets the advisor and the client agree on upfront. Alternatively, hold off on billing the client until all the assets have been transferred to the recommended custodian, and an asset-based fee calculated at the end of the normal billing period (quarterly or monthly) for the period beginning with the date the agreement was executed with the client.
If the client is currently using an advisor that charges a fee, I may in that instance negotiate with the client to help abate a double charge that could occur. However, the other advisor's fee should terminate on the day the client notifies them they have been fired, not the day that assets "transfer" from their custodian. The other advisors should not be charging a fee on assets that it no longer has an advisory agreement on. I believe this to be, at the very least, unethical, and arguably a breach of fiduciary duty. Regardless, the agreement with the previous advisor should make it clear what happens when the client terminates the agreement and how they will be charged on termination.
Option #1 (when assets show up at custodian) or #2 (when contract is signed) would be proper.
At our firm, even though we sign a contract, we only bill when the assets show up to where we are managing. But certainly you can make a case that, when the contract is signed (#2), you are starting “management,” which includes the movement of funds to the right custodian.
Not charging the client until the assets are transferred to your custodian gives little incentive to get the assets moved quicker so you can start managing the client’s money and create a bill. Plus, if assets are showing up from different places at different times, it makes the first quarter billing a little more difficult.
The option to charge hourly is messy, in terms of tracking hours. Unless you have a system in place already how do you verify and validate it. I would not choose option #3 and believe option #1 or #2 are best.
Of course, it depends on the client and what he will agree to. Also keep in mind that from a long-term perspective, there may not much at stake. But I do understand you are doing work and not getting paid until the assets show up.
Rob O’Dell, CFP®
Yes, you should charge during the transition period.
I’m not sure if there’s an “industry standard” around billing during transitions.
We believe a firm that charges exclusively based on assets under management might experience a conflict of interest, especially when they provide planning for their clients in addition to investment advisory services.
We charge clients a discovery and planning fee that will range between $3,000 and $12,000 before we will agree to manage their assets. This allows us to be compensated for the work we do in building a mind map, an elaborate graphic representation of their current financial situation that is easy to understand and serves a good metaphor for working with the client. That initial planning fee also covers financial planning, income tax projections, and creating an Investment Policy Statement.
Think about it for a second: how can an advisor adequately write an IPS for a client if they do not understand that client’s investment objectives. Mind-mapping, our discovery process that technically occurs before actually managing a client’s assets, builds client-advisor understanding necessary for making good investment decisions. So, yes, it is totally appropriate to charge a client in this transition and to begin your discovery process.