AUM Pricing: A Dinosaur in Today’s Financial World?

It’s no state secret that the financial advisory market, pricing-wise at least, is primarily based on the client’s total assets under management.

But is the AUM model a good one for clients? Maybe not.

In a study by the investment management firm SEI, researchers say advisors are “sluggish” in addressing pricing model concerns, primarily because clients are “uncomfortable” discussing fees with advisors.

Increasingly, some customers (especially the 35-and-under demographic) view the AUM pricing model as antiquated, arbitrary, and stale as three-day old bread. In particular, the idea of minimum asset management pricing levels really seems to chafe younger financial consumers, who, frankly, just weren’t raised that way in a digital culture.

That culture, experts say, is more aligned with monthly subscription rates, much like a client would pay for Amazon Prime, Netflix or LinkedIn Pro.

“I am a 28-year-old millennial myself, and I work with many clients who are also millennials,” said Benjamin S. Offit, a financial planner with Clear Path Advisory, in Pikesville, Md. “Many younger clients don’t have significant investment assets to warrant a 1 percent advisory fee, but they need help in building assets, saving money, and cash flow, just the same.”

Therefore, Offit explained, younger financial consumers need to learn the right financial disciplines and habits so they can eventually even save enough money to warrant a 1 percent fee, which they can’t get in many cases.

“That’s why I help younger clients with a membership or subscription model that appeals to them, because they have access to my firm and our platform in a similar way they are used to with things like gym memberships,” he said. “For $100 a month, for example, they can get great advice in many financial planning areas and be on their way to being a great client in all respects.”

Clients are generally confused about advisor fees in the first place, and that confusion leads directly to frustration – at their financial planner, said Marc Lowlicht, chief executive officer with Opes Private Wealth Management in East Hampton, N.Y.

“First and foremost, clients may not fully understand what they are paying,” Lowlicht said. “I see many instances where the client doesn’t think they are paying a fee at all, when in fact they are paying hidden (in the prospectus) fees based on the 12 b-1’s of different share classes.”

But clients should recognize, but often don’t, how hard financial planners and advisors work for them, he said. If they did, those clients wouldn’t be as vocal about standard AUM pricing models.

“The focus on low cost ignores all the work that both financial planners and financial advisors do,” Lowlicht added. “That includes sifting through the thousands of mutual fund families available for the best options in each asset class, understanding the appropriate asset allocation based on the client’s needs, risk tolerance and time horizon, and allocating tax inefficient investment into tax deferred accounts and tax efficient ones into taxable accounts, among other services.”

Still, more and more clients are not seeing things the same way.

“Assets under management fees are not transparent,” noted Carrie Catlin, principal at Fenway Financial Advisors in Boston. “These fees are typically deducted from clients’ accounts over and over and over without an invoice.  Clients pay and pay and pay these typically high fees without thinking about the value and service delivered.”

Transparency, Catlin said, is the great equalizer.

“There really is a better way,” she said. “Deliver services on an hourly fee or fixed fee basis, which is what we do.  Then, provide clients with an invoice so they know what they are paying – and when they are paying for it.”

Brian O'Connell is a former Wall Street bond trader and author of the best-selling books, such as The 401k Millionaire. He's a regular contributor to major media business platforms. He resides in Doylestown, Pa. Brian may be reached at [email protected].

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