Pay It Forward: Gauging the Future of Financial Advisory Fees

By Brian O'Connell

Advisory fees are evolving and trending away from the traditional fee-based advisor payment model – and that trend is a big deal to both advisors and clients.

In a new report, New York City-based Simon-Kucher & Partners lists eight alternative pricing options for advisors to consider going forward, with both pros and cons involved.

Completely dispensing with the old advisory payment model is not in the equation.

“The future of fees is not a shift from the traditional AUM to a new fee model,” said Wei Ke, managing partner in the global banking division at Simon-Kucher & Partners. “Rather, the future will be characterized by more diversity where a variety of fee structures will emerge to meet the needs of new and underserved client segments, and changing market conditions.”

Here’s a list of eight new payment options, as defined by Simon-Kucher:

Charging by the Hour: This model is championed by Mark Berg of Timothy Financial, considered a pioneer of the professional hourly fee model.

The 3-part Model: This model combines assets under management, plus an upfront fee, plus different fee metric for each part of the value proposition.

Fixed-Fee Only: Carolyn McClanahan of Life Planning Partners broke entirely from AUM-based fees and charges annual fixed-dollar fees based on client complexity.

“She considers factors that directly affect advisor workload, such as asset fragmentation,” the report found. “Her clients unfazed by the number of significant figures in her fees, do not object to fee increases. Some even laugh.”

The McDonald’s Menu: This payment model, developed by Bill Simonet of Simonet Financial, mirrors the menu at the fast food chain.

“Simonet noticed McDonalds had no trouble selecting their ‘meal bundles’ and wondered if financial planning could not be made equally straightforward,” Simon-Kucher said.

The 'Gen X' Model: Jude Boudreaux of Upperline Financial built this fee model around his target client, the Gen X client without large, liquid asset reserves.

“Realizing that such clients have a pressing need for financial advice, and have decent incomes with which to pay for it, he linked his advice fees to income and net worth,” the report noted.

The Subscription Model: This payment model allows clients to self-select according to preference and personality.

“In an industry that typically loves to make decisions on behalf of its clients, this is a true anomaly and looks forward to a future that gives clients choice and enables a truly tailored service,” the report concluded.

The Super-Retainer: This model more or less obliterates the myth that charging dollar fees translates into small potatoes, the report stated. It was created by Steve Lockshin of AdvicePeriod.

“By solving problems for his clients that mystify lawyers and accountants, he eschews asset management in favor of what he regards as the future of financial advice, which is precisely that – advice,” Simon-Kucher noted.

Modular AUM-based Pricing: This model, developed by Nick Revis of Elston Financial, provides a “novel twist” on the standard AUM model by allowing clients to receive a stripped-down or full-service proposition, with the price varying according to the level of service.

A Need for Change

New payment options popping up on the financial advisory landscape didn’t happen in a vacuum, investment professionals say.

“The biggest trend in financial advisory fees along with the new types of fee options is the fact that advisors are having to do more and more to justify their fees,” said Ashley M. Micciche, CEO of True North Retirement in Clackamus, Ore.

It wasn't uncommon for advisors to charge an AUM fee and financial planning fees on top of that, Micciche said.

“In many cases, the asset management has become more commoditized, so advisors are expected to do more if they want to justify their fees,” she said. “For example, if a client of ours needs a detailed financial plan or a social security analysis, we include that as part of our service offering and do not charge extra.”

A shift to new payment models could also spell opportunity for advisors.

“Many large broker-dealers in the wealth management industry don't really know how to deal with different fee models, and as a result may fall behind, giving independent advisors who have more flexibility in their pricing model an advantage,” Micciche said.

Many firms are taking away the ability to charge separate financial planning fees, because they could run afoul of the proposed DOL fiduciary rule.

Younger Client Driving Fee Changes

The millennial generation, which has grown accustomed to paying lower prices for products and services, usually through digital-based platforms, is also helping to drive payment change in the industry.

“We’re using a monthly retainer or subscription model,” said Levi Sanchez
co-founder at Millennial Wealth in Seattle. “Clients pay a fixed dollar amount monthly for financial planning services. This allows financial planners to work with younger individuals or families that haven't accumulated the assets typical AUM firms charge.”

Millennials are already used to paying for monthly or annual services, such as Netflix, gym memberships, or Amazon, he added.

As more and more companies shift to new payment models, in large part to accommodate younger and more service-minded clients, further change is expected.

“At our small firm, we have over 20 different fee schedules for different clients, so customization based on client needs and complexity is something that clients are demanding,” Micciche said. “That’s becoming the norm, at least for us.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]