RIAs overwhelmingly continue to charge fees based on assets under management, but alternative fee structures, including flat fees, are gaining ground as the industry fights to pull clients out of brokerages.
Even in the midst of a second tumultuous pandemic year, some financial industry verities remain in place. For one, registered investment advisors’ fees remain around 1% of assets under management. According to the latest annual survey of over 1,800 firms conducted by RIA in a Box in the first quarter of 2021, the average RIA advisory fee was 0.95%.
Moreover, basing fees on managed assets remains common.
“The AUM model is favored by most RIAs,” said Mark Elzweig, who heads his own executive search firm in New York. Typically, that’s a tiered fee schedule, charging lower rates for assets above a certain threshold. In a recent white paper, Chicago-based financial technology platform Advyzon reported that 85% of its firms prefer a tiered fee structure.
“The tried-and-true model is easy to explain,” Elzweig said. “There is some experimentation with flat-fee and retainer models, but with AUM, advisors don’t need ongoing discussions about fees.”
Chris Cordaro, partner and wealth advisor at RegentAtlantic, a wealth management firm in Morristown, New Jersey, agreed.
“We are on the old-school AUM schedule,” he said. “It’s simple, easy and it works. Flat fees are great for the consumer but tougher for advisors who may have to renegotiate fees each year.”
But that doesn’t mean some advisors aren’t exploring new pricing options in quests to attract or retain clients.
Changing times
The AUM pricing model might not be right for all RIAs and clients. Indeed, some RIA firms already have found that flex planning on fees can make financial sense and some are considering a multiple choice menu of pricing models.
“At industry events, a leading trend is that à la carte pricing would be on the rise,” said Tina Hohman, executive vice president of wealth management at Alera Wealth Services in Deerfield, Illinois. “Our firm charges a percentage of AUM, but the next generation of clients likely will look for other fee models.”
Mike Papedis, managing partner and founder of Fusion Financial Partners, a Carlsbad, California-based RIA consultant, said that high net worth and ultrahigh net worth wealth advisors, family offices and asset managers use tiered fees, flat fees and, occasionally, performance-based or hourly fees. “The new trend,” he said, “is estate planning fees being separated from AUM fees.”
Looking ahead, Earl McAlear, vice president of strategy and business development at Broadridge, a financial technology company based in Lake Success, New York, said the demands of the next generation of clients will require more fluidity in pricing and fee models. “These clients expect flexibility in how their money is managed, in the way their financial plans are established and in the fees for their interactions with advisors,” he said.
Successful RIAs may have to tailor fees to individual clients and revisit those charges regularly, McAlear added.
Favoring flat fees
While AUM charges remain common, other types may be used alongside, especially flat fees. Advyzon found that 25% of its RIAs with less than $100 million in assets use flat fees, and that level increases to 36% for RIAs with more than $100 million in assets.
“Anecdotally, the number of firms introducing some sort of flat-dollar billing is increasing,” said Charles Rowlan, senior vice president of development at Advyzon. “The revenue from flat fees may be small for most firms, but it’s increasing. A minority of RIAs bill entirely or almost entirely using a flat fee.”
According to Papedis, flat fees especially gain traction in large family offices, as wealthy families like knowing their fees can pay for advice ranging from lending, financial planning, family governance, insurance, taxes and multi-generation account aggregation to concierge service.
As he noted, RIAs increasingly offer estate planning.
“Many households resist starting or executing an estate plan due to the high cost of using attorneys, who may charge $3,000 to $6,000 for a simple estate,” Papedis said. “To solve this problem, advisory firms are adding technology that can deliver estate plans at a fraction of the cost. Providing such plans gives RIAs a competitive advantage, enabling them to become the quarterback for the estate planning process. Furthermore, this arrangement leaves the highly complex or very wealthy situations for estate attorneys, so those potential referral relationships can stay in place.”
Encouraging words
Some advisors report success with mixed fees or even non-AUM tactics.
“We have recently moved to a system that blends retainers [variable minimums based on service and segmentation levels] and AUM basis points,” said Brent Brodeski, CEO and financial advisor at Savant Wealth Management in Rockford, Illinois. “I think it’s the best of both worlds.”
Gary Pittsford, chief valuation officer at Castle Valuation Group in Indianapolis, sees a significant amount of non-AUM fee income.
“Many of our clients are business owners who may have substantial wealth but relatively little in the way of investment assets to manage,” he said.
Advising such clients, who may have business-related real estate in multiple states, can be very complicated.
“We might spend a great deal of time working with their attorneys and tax professionals,” he said. “For such clients, we supplement the asset management fee with retainers, which typically cost $1,000 to $3,000 a quarter.”
Sheila Chesney, principal at Chesney & Co., a wealth management firm in Sheldon, South Carolina, has shifted to non-AUM fees recently.
“In prior years, we split our fees between a financial planning retainer, based on the complexity of the client’s situation, and an asset management fee,” she said. “It did not appear that advisors could provide financial planning advice if they were compensated only by AUM.”
Over time, Chesney said, clients were becoming more resistant to paying fees.
“At the start of 2020, we converted to fixed retainers,” she said. For Chesney, one factor behind this move is that regulatory issues are “making it harder to justify an AUM fee. If you can’t prove continuous and regular supervision, you are toast.”
Just as is the case with financial planning tactics, advisors may have to demonstrate justifiable reasons for the type of fees they impose — and the resulting amount that comes due — to regulators as well as to clients.
