Digging into Fees: How to Unearth Revenue Opportunities

Written by: Raef Lee | SEI

This article originally appeared on SEI's Practically Speaking Blog.

In our recent research into advisor fees, one thing stuck out: most advisors spend the same amount of time thinking about the right advisor fee structure for their business as a polar bear thinks about the cost of sunscreen (Editor: maybe an outdated analogy, Raef.). This is mainly due to the Assets Under Management (AUM) model, which is a simplistic catch-all – simple for the advisor and simple for the client.

Instead of talking about whether or not to charge an AUM or a retainer fee, let’s look at the side issues that can be key revenue generators for advisors – the ones that can firm up (or detract from) the value proposition you are trying to project.

3 ways to charge

When advisors congregate, there are usually three main positions on how to charge for financial planning:

I’m an investment advisor and I do not charge for financial planning (I started with the easy one).

Financial planning is a big part of my value, it is the first thing I do with a client, and so I charge for it (anything from $1,500 to $10,000, depending on the depth of planning).

Financial planning is a big part of my value, but I do it over time – so instead of charging for it, I use it to justify my AUM fee.

We polled 775 advisors and asked them if they used an AUM model and charged for financial planning separately – 26% said yes. This number makes sense to me, because a lot of advisors just focus on investments.

Like all discussions on how to charge advisor fees, there is no right or wrong answer. But how do you decide? Answering these questions may help you determine what’s right for your practice.

1. Do you have a planning model that is a cyclical and constant part of your service?

A few things to consider with this ongoing planning model:

It makes sense to use either #3 above, or a newer variation, which is to break out your fees and charge (say, 25BP) for your asset management service and a tiered planning fee (say, $500/month).

Charging a single AUM fee covering planning is the simplest and easiest model, whereas breaking the fee into two parts is a more direct way of highlighting the services that your clients are paying for.

With this model, it makes more sense to start transferring assets immediately when you turn a prospect into a client, so the planning is entwined with your asset management advice, forming a single service in the eyes of your client.

2. Do you do a lot of planning initially and then focus on investments?

This model is dwindling, as financial planning matures into a constant activity. But here are some things to consider with this one-time planning model:

It makes sense to use the #2 model above, with the obvious rationale that an initial plan is a lot of work and has a great deal of value, and the advisor should be compensated.

There’s a downside to starting your relationship with a new client by asking upfront for a large fee, at a time when you have not yet built trust.

This model often requires you to do the plan first and then transfer assets to your management. This is a longer process and requires you to have two distinct conversations with your clients: one around the planning fee and one around the AUM fee you charge for asset management. This discounts your ongoing planning advice, which is an inevitable service.

How you do your planning can guide the way you charge. Either way, you should ensure you are compensated for your planning, in a way that you can easily explain to your clients.

What about small accounts?

“I have minimums!” I hear you cry. True, but look through your book and see how many clients fall below your minimums. You will be surprised how many fall below that threshold. The clients in this group are euphemistically called “accommodation clients” and often include:

Referrals from your best clients (whom you do not want to upset)

Family members of your best clients

Early clients, from those early days when you were not turning any clients away

Merged clients, from a new advisor in your firm who came with a book of business with a different standard of minimums from yours

In our survey, we found that 74% of advisors do not have a different fee structure for these accounts. That is, you are offering these small account holders the same full service, whilst being paid less, due to their low AUM. Hmmm. Does that sound right?

One type of intentionally small account clients some firms have focused on are younger with high-income professions (like doctors and lawyers). They have been dubbed HENRYs (High Earning, Not Rich Yet). The idea is that you are putting a deposit on them for when they do build their wealth.

The real issue with the HENRYs is that they require very different financial advice to your regular clients. They need:

Guidance around student debt

Help with multiple life events (first house, first spouse, first baby)

Help with investing in their careers, such as more education or buying into businesses

Servicing HENRYs often requires one of your advisors, typically a young one, to develop a different set of skills.

With both accommodation clients and HENRYs, it makes sense to charge a retainer model – which can vary depending on the services offered – from $600 to $5,000 per year. The accommodation clients are on the low end; the HENRYs, because of the extra service, are on the high end.

If a firm wants to try out a retainer-based advisor fee model, this is an excellent way to do so. It can be a step-in to see what works and what doesn’t, and then be expanded to more of your clients, if it is successful.

The Assets Under Advisement (AUA) model

Lastly, advisors could hone their fees around AUA (that is, fees on “held-away” assets). For the majority of potential clients, a big part of their wealth is stored in qualified plans, such as 401(k) or 403(b) accounts. These are assets that advisors cannot put under their management.

A majority of advisors review clients’ held-away assets so that they can provide a comprehensive plan. Often, they use aggregation to look at these holdings. Most advisors give advice on these assets within the qualified plans and then the investor executes the transactions on the accounts. Thus, an investor is given a comprehensive financial plan across all of their accounts.

Aggregation firm ByAllAccounts conducted research in 2015 showing 45% of advisors charge some fee on AUA accounts . They found that typical AUA fees are less than a full AUM fee, in the range of 25BP to 100BP, with a sweet spot of around 50BP.

This surprised me – and I was surprised again when many of our advisors told me they charge some sort of AUA fee.

With the maturing of aggregation on personal financial management websites such as www.mint.com , AUA fees will be harder for an advisor to justify. Investors can do their own aggregation essentially for free.

Some advisors have made a complete business around AUA advisor fees, focusing on wealthy investors who have money at multiple institutions. Typically, they not only supply broad positional aggregation (the holdings in the accounts), but also sophisticated performance information across an investor’s holdings. This type of investor regards the flexibility of having different accounts in different institutions as key – and is prepared to pay for it.

Advisor Fee Research

The information I’ve shared here is just one output from our recent research into advisor fees. You can download our Fees at a Crossroads report , which covers the full current state of advisor fees and acts as a guide for advisors who are looking for different options.

I also recommend checking out our Fees at a Crossroads infographic – it illustrates how you can select a fee model that reflects your true value.