Charging the “Right” Fees, and the Great Payments-Tech Conundrum

Let’s talk about compensation. More specifically, let’s discuss how independent RIA-based financial planners get paid by their clients. Then we’ll look at ways these advisors can broaden in-house fee structures to serve more clients in need of their help — and perhaps do it more efficiently than ever before.

Fee Structure #1: Charging on Assets under Management (AUM)

Hands down the most popular payment model for RIA-based advisors is charging a fee on assets under management. That’s where RIAs charge a percentage of each client’s AUM, typically on a monthly or quarterly basis.

How much do advisors charge in this model? Typically, around 1% of AUM, but that may not include what the underlying fund managers charge, which are usually passed through to the consumer. With fees bundled, retail RIA clients were charged, on average, 1.17% in 2019, according to RIA in a Box, a compliance and cybersecurity provider to RIAs. The median all-in fee was 0.98%, however, indicating that about half of RIAs charge a bit less than than the “typical” 1%.

In the wider advisory world, including brokerage-based advisors and call-center complexes, all-in AUM fees can run as high as 3.50% and as low as 0.38%, according to a report by Personal Capital, an RIA in Redwood City, Calif. Of course the higher the fees, the greater the negative impact of inflation on returns, especially in periods of volatility.

And there are several permutations to the AUM-fee model among RIAs.

Variations on a Theme: Tiered and Other Approaches to AUM Fees

Some firms offer flat fees that are tiered across entire portfolios. So, if the total portfolio value is under, say, $2 million, the RIA might charge 1.5% of the client’s AUM.

But for portfolios worth more, fees decline in increments until you get into “negotiable” territory where clients with investment portfolios worth more than $25 million get more say in how much they’re charged. This formulation is a nod to the deal-making might that comes with scale.

Other firms use tiers, but charge at different rates at different levels of portfolio size within the same relationship. In this structure, a client may be charged something like 1.75% on the first $250,000, 1.50% on the next $750,000, and on up through different tiers. In this model, an ultra high-net-worth client might pay 0.50% or less on invested amounts over $25 million. To some, this structure is more fair to clients because everyone pays the same amount at equal deposit levels.

Also under the broad rubric of fees on AUM are fees by asset class. This may mean charging a small nominal fee (or nothing) on cash reserves, and charging, for instance, 0.75% on fixed-income holdings, and 1.50% on stock positions. To some degree, this approach mimics the pricing modules available to institutional investors such as pension plans and university endowments.

Performance-Based Strategies for Raising or Lowering Fees

There are also performance wrinkles on the AUM approach. A firm called Pure Portfolios in Portland, Ore., charges its clients a percentage of their AUM. The wrinkle? The firm will reduce the next year’s fees if the present year’s (usually pretty modest) growth target isn’t reached. The aim there is to align the firm’s interest with the client’s — and, undoubtedly, to provide a point of distinction to help the firm stand out from competitors.

Other practices flip this concept in emulation of some hedge funds by levying additional fees for benchmark outperformance.

Fee Structure #2: Charging for Work by the Hour or Project

Meanwhile, a growing cadre of advisors has decided hourly fees make more sense for them and their clients. In this model, advisors charge fees ranging between $100 to $400 an hour, usually for a special project or a consulting mandate.

Examples of such projects include:

• Formulating financial and college-savings plans

• Handling IRA-to-Roth conversions

• Household budgeting including mortgage strategies, sudden-money management, and Social Security planning

Most advisors who charge by the hour will also offer to tackle work for clients on a project basis — roughly $1,000 to $3,000 all-in, typically for a one-time comprehensive financial plan with a set of investment recommendations.

Advisors in this camp usually don’t manage any of their clients’ money, nor do they arrange for the custody of their clients’ investment holdings. They make recommendations, period, with implementation — while implicitly guided by the advisor — usually left to the client. Visit the ADV filing of an hourly planner and you’ll probably find an AUM of zero, or some token amount linked to legacy or family accounts.

Proponents of this hands-off-the-assets approach say it’s more conducive to unbiased advice. In this light, an advisor who charges on AUM might be reluctant, unconsciously or not, to suggest anything — such as tapping into an investment portfolio to pay down a mortgage — that would reduce billable assets.

Fans of hourly and project fees are also likely to argue this structure is a good way to attract middle-market clients, especially younger ones. For such clients, this structure provides a sample of what financial planning can do for them without forcing them to make a lasting commitment.

Fee Structure #3: Charging on the Basis of Subscriptions or Retainers

Speaking of the notoriously underserved middle market, some advisors have taken to charging their clients “subscriptions” for their services — specifically in a bid to provide financial planning to next-generation clients. In this model, clients pay for on-going services the same way they pay for health-club memberships: with monthly retainers that come out of their cash-flow, not their investments. The monthly charge is typically in the range of $150 to $350 a month.

Where hourly billing may discourage engagement with advisors (since every “touch point” is billable), the subscription model encourages it, say backers of the subscription model. They also assert it frees advisors to focus on providing services rather than scrambling for new clients who may book just a couple of billable sessions.

It’s ironic that the subscription approach touted for its appeal to younger clients owes as much in conception to high-end wealth management as to gym memberships. In family-office circles, “retainers” have long been an option if not the norm. Though substantially similar to subscriptions, wealth-management retainers come at steeper prices in keeping with much bigger portfolios and far more complex financial situations.

Bringing RIA Fees Together in a Unified Payments System

Again, there are combinations to every fee structure out there. One structural blend might include a mixture of flat fees and annual retainers. Another might involve a monthly retainer plus the cost of third-party investment products the advisor recommends. And it all adds up.

But the big takeaway from this discussion is that different clients respond to different fee structures.

The tendency has been for RIAs to go all-in for one or another, but that’s not universal. There’s an emerging faction that bifurcates its service and fee offerings. Clients with bigger, higher-touch engagements are charged an old-line AUM fee. Smaller engagements get the “robo” treatment, outsourced to the RIA as a white-label offering from a fintech provider.

By implication, adding more fee options would attract even more clients. So what’s to stop independent RIAs from expanding their fee structures to provide two, three or even more choices to their clients and having them run seamlessly by a back-office-service provider

What’s stopping them, frankly, is the lack of a payments-processing technology nimble enough to accommodate their needs.

And that’s something Chalice Network will address very soon.