The Prescription for What Ails Your Fee Structure

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Written by: John Anderson | SEI

I’m not taking a complete break from the DOL fiduciary rule this week, but I thought it would be interesting to go back to a broader theme that has also really been a focus for us this year: fees. More specifically, Fees at a Crossroads ; the report and webinar that we published and presented in January. Ultimately, I believe the fee discussion is broader than just the DOL; that rule is just accelerating the conversation for many advisors.

Here are the two very distinct options for advisor compensation that we discussed in the webinar, with some concrete examples:

Option 1: AUM fees
$500,000 account with 100bps advisory fee = $5,000 in gross revenue

Option 2: Modular fees
$500,000 account with .25bps investment oversight fee and $950 per quarter advice fee (both deducted from the account) = $5,050 in gross revenue

You can see that the compensation is relatively the same. Obviously, there are pros and cons to each model, including transparency, ease of use and the fear of ongoing fee discussions. But frankly, both work for many advisors and many advisors will argue with change. When you look at your current business model and (more often than not) the products you are using, you might be thinking:

  • With all these discussions around fees, why should I lower my fees, when the products I use don’t lower theirs?
  • If I switch to an all passive strategy, the client will pay less – so why can’t I keep my current pricing?
  • What if my clients are already complaining about fees and considering moving to a Robo-advisor or virtual advisor platforms for investment advice?

    • To answer these questions, I have an analogy that may work – concierge medicine (also known as retainer medicine).

    Access vs. product


    Concierge medicine is a trend that is rapidly growing in healthcare. Concierge medicine is a direct relationship between a patient and a primary care physician, in which the patient pays an annual fee (or retainer) for access. While the doctor and patient have a better, closer relationship, the patient still pays a separate price for medicine.

    The patient pays for access, advice and knowledge, and the doctor reduces his/her patient load, as well as moves out of the commoditized world of insurance companies and Medicare. That said, the ancillary product (a pill) is not discounted or negotiated. The patient is prescribed what they need and they pay extra for it. Taking it a step further for our analogy, if the medication (or the investment) does not work, the doctor (or the advisor) can move to a different drug (or investment product).

    So how would I answer those earlier questions?

    1. You absolutely should not lower your fees, regardless of the products you use.


    Look at the examples above. Both get you to the same gross revenue. Your time, expertise and experience are all worth something – and only you can determine what it is worth. Either an AUM model or a modular model may work for you, as long as you:

  • Understand your value proposition. Go beyond just investing; know your niches and clients
  • Can clearly articulate what the client can expect from you
  • Demonstrate a service roadmap

    • Remember, fees come into question only when value is not perceived.

    As for the products, if they add value, they will pay for themselves. The product manufacturers have the R&D costs, the production and the testing. They get their fees for providing the product, not for the advice on how to use it.

    2. Charging an AUM fee to mirror the market invites questions down the road.


    Some people truly believe in passive investing – I get that. But couldn’t clients ask why they shouldn’t just go to a robo-advisor or direct to a passive fund company? “Why do I need you to buy and index? The robos do passive and do it really well and very cheap.” Do you want to play that game?

    3. If what clients pay is dependent on the markets and the economy, they are going to associate those costs with your ability to control what you can’t.


    Again, it doesn’t matter if you use an AUM model or a modular model, they’ll question fees if they don’t see value in the relationship. The question itself may be about fees, but the real issue is deeper – the client thinks he’s not getting his money’s worth. I think the bigger answer here is to review expectations with the client – about what you deliver, and about your relationship and your services. Something is missing, and it is manifesting itself through questions about fees.

    Your turn

    Since Fees at a Crossroads debuted in January, this topic has been very hot. I think it will continue to be discussed for a long time. I love the questions, comments and suggestions that we have been getting. Keep them coming.