More financial advisors are using non-AUM fees. Here's how

Securities regulators often pose questions to registered investment advisory firms that use alternative fee models to the industry's traditional 1% of assets under management. So financial planner Carolyn McClanahan, the founder of Jacksonville, Florida-based registered investment advisory firm Life Planning Partners, was well-prepared for her first audits by state regulators and the Securities and Exchange Commission, she recalled.

McClanahan and her team keep records documenting their services, which comes in handy around examination time. One auditor seemed especially impressed after her first SEC exam years ago, she noted in a panel at the Strategy Forum conference held this week in Chicago by professional networking and development organization the Investments & Wealth Institute.

"She called me and asked for a job," McClanahan said. "The beautiful thing is, we highly document everything we do. So we have this spreadsheet that shows everything we deliver, the client's name over here, each part of their plan, and we have the date we delivered it. And I showed one auditor that spreadsheet, and they said, 'Oh my God, you really do all this.' And then we can actually pull up the report that matches that date. They are amazed."

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McClanahan and Dana Anspach, CEO of Scottsdale, Arizona-based RIA firm Sensible Money, shared how they use fees in their advisory practices. While the use of AUM alternatives such as subscriptions, fixed fees, retainers or performance costs are rising as RIA owners design their firms based on the models they believe fit their clients' best interest and their preferred business structure, asset-based expenses still represent the most typical client charges. 

Advisors like Anspach are finding success by going their own way. She has raised the rate she charges for a financial plan two times to its current level at a minimum of $6,900, she noted, remembering when she shared her choice of rate with her team. 

"I'll never forget that meeting, because I had a planner who started bawling as we just made this decision — 'We're never going to get another client again,' is what she said. And the result was we got better clients," Anspach said. "They were higher net worth. They were more engaged in the process, and so we were now being fairly compensated for the time and the expertise that it took to deliver the plan. And we find that people do want that full service."

More advisors are finding value in other types of fees as they seek compensation reflecting the time spent onboarding new clients. A non-AUM approach to fees may also help advisors increase their addressable client market, meet the needs of high net worth investors seeking different kinds of charges or find the appropriate rates for specialized services, according to the panel's moderator, Christine Gaze, founder of practice management consulting firm Purpose Consulting Group.

AUM-tied fees remain the most common type of charges paid by RIA clients, but the share collecting a form of fixed expenses has risen over the past decade, according to the latest annual snapshot by the Investment Adviser Association, an industry trade group, and compliance firm COMPLY. Nearly half of all RIAs collect fixed or hourly fees and, among those that offer financial planning services, 85% of advisory firms use at least one of those models. Only 17% of RIAs use AUM fees alone, and a smaller share, 5%, do not charge clients any expenses tied to a percentage of client assets.

"Advisor compensation structures align advisor interests with their clients' interests," the snapshot report said. "Through asset-based fees and performance fees, advisors link their compensation to the success of their clients' investments. By charging fixed and hourly fees for some services, advisors can provide services other than portfolio management, such as financial planning, in a cost-effective manner."

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In terms of that standalone charge for a comprehensive financial plan, the median rate charged by RIAs jumped 77% between 2015 and 2022 to $3,000, according to data compiled by planning entrepreneur Michael Kitces and cited during the panel by Gaze.

"And why I think that is so interesting is, if you look at the AUM fee over the last decade, it's been absolutely flat," she said. "And we all know the direction that the investment management fees have taken. Over the last decade, there's been a ton of fee compression there. So I just think that the market signals are telling us something where you're seeing such inflation. This is showing you that there's huge client demand in financial planning, and clients are willing to pay for it."

For example, McClanahan's firm charges clients annual fees starting at $10,000 a year up to $60,000 at the top end based on complexity using her spreadsheet-informed calculation of the time she spends on each account, she noted. She begins with $5,000 for single households and $6,000 for couples if they have children. Then she adds another $1,000 if they have older parents, another $1,000 if they have businesses, $2,000 to $4,000 if they have multiple income streams, another flat fee linked with the amount of money in their bond portfolios, and, potentially, an extra $1,000 if they're disorganized or a reduction of $1,000 if they're organized.

"It's different for everybody," McClanahan said. "That asset manager is going to charge you the same, if not more, but we're going to be basically a family office without paying the bills. It's like, this is a bargain. The few clients that will push back, I say, 'Try us out for a year.' … We get so many clients, I can be selective. I say, 'Try us out for a year. And if you don't find us valuable, you can fire us.' Nobody fires us."

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At Anspach's advisory firm, she uses a fee model that she calls the "Juicing" and "Juicing Plus" plans. Clients must complete her comprehensive planning process over several meetings at a rate of at least $6,900 and up to $8,900 for the most complicated plans before placing them on a regular AUM fee that starts at 1.25% for the first $1 million of assets, she noted.

"The juicing analogy came from me having breakfast at a place where they served fresh squeezed juice," she said. "I had been making margaritas at home the weekend before, and there was always extra juice left over in the rind. I've been trying to hand-squeeze them, and so I'm watching this machine, and I'm like, 'I bet that gets more juice out of every orange than I ever can at home.' And it was kind of like, that's what we do for clients, like through a rules-based process, we can squeeze more out through Social Security-claiming decisions, through tax optimization of withdrawal strategies. So it wasn't about squeezing out of the investment management side, but really out of the planning side."