bang for your buck

Biggest Bang for the Buck—Are you making the most from your financial advisory practice? | Part Two

The advisory firm’s pricing structures have many permutations. The chart below outlines the primary ways advisors charge clients for their services. Advisor fees can be arranged in three basic categories: fee-only, fee-based and commission only. The trend is toward charging fees for assets under management (AUM) whether a Series 7 stockbroker or a Series 65 investment advisor although some advisors continue to work in a commission only structure.


Fee-Only % of AUM Fee for Service Fee for Product
Fixed % Hourly Rate Financial Education Classes
Fixed % w/AUM breakpoints Set Retainer Fee Financial Plans
Tiered Pricing Minimum Yearly Fee Newsletters
SS or other specific analyses
Fee-Based Any of the above plus products such as insurance, limited partnerships, REITS, and mutual funds that pay the advisor though commissions and other fees.
Commission- Only  

Providing only products that pay the advisor through commissions and other fees.

The industry is moving toward charging based on a percentage of assets under management as the return is better and it produces a sustainable income level.  The return on assets is also higher.  PriceMetrics in their 2015 State of Retail Wealth Management report claims “…the average fee RoA is now 1.02%, the average transactional RoA is now 0.53%”.

AUM fees are charged within a broad range from the lowest robo-advisor fee of “free” offered by Charles Schwab* to over 3% on assets of typically $250,000 and under. These fees can be charged in arrears or in advance and can have breakpoints based on the amount of AUM a firm manages for each client.  Tiered pricing is also based on the amount of AUM but the fees are layered based on a fee chart with, for example, the first $250,000 charged 1.5%, the next $750,000 charged 1.25%, and so on.

Reassessing Fee Structures

The idea that all services and products are lumped together under the percentage fee for money management is not a transparent compensation structure for clients and limits the advisor’s ability to be compensated appropriately. Do you charge for a financial plan?  Do you charge for reviewing and amending the plan once per year? What is your money management fee structure?  Do you charge enough? These are just some of the questions advisors should be asking about their fee structures.  Most significantly, advisors need to assess where their time is allocated because this should become the area with the highest compensation.

For example, if the firm offers financial planning but the plans are completed by a para-planner and given only a cursory look by an advisor before they are presented, then the time input from the advisor is minimum.  If, however, an advisor spends a great deal of effort and investment of time to produce a comprehensive plan which truly reflects the client’s issues and goals, then the fee charged for the plan should reflect that effort. Fees need to align with the services a firm offers.

An active investment strategy which requires knowledge, experience and concentrated effort to monitor and select appropriate assets would support a higher fee structure than a simple risk adjusted portfolio of DFA funds.  Charging high fees for managing passive portfolios could be problematic in the future. In this case, expertise plays a role.  If advisors have a CFA or investment management experience they may be able to justify higher fees than non-credentialed advisors.

Additional services can become profit centers for firms where the advisors have specific expertise. What differentiated services can be billed separately?  Does your firm offer divorce financial advice, real estate analysis or detailed tax planning? Can you design educational programs or write books clients would want to buy? Billing for special services allows clients to choose what services they need or want in a way that is equitable.  Don’t we all hate the fact that cable companies bill us for channels we never watch? It’s a similar situation with advisory firms.

Creating a fee structure based on services can mitigate some of the inherent conflicts-of-interest present in charging a percentage of AUM. For example, a potential conflict of interest exists when an advisor tells a client not to pay off a high interest mortgage because it would reduce the billing on AUM.   Charging separately for a real estate and mortgage analysis mitigates the loss of fees under this circumstance and lessens the possibility of self-serving advice.

Fairness is key.  Not only does this engender client trust but the SEC is looking at the fairness of fees across client assets.  Tiered pricing is problematic if accounts are not combined or consolidated properly.  Is your pricing structure employed equitably?  Are you charging some clients more than others, and if so, is there a clear asset level delineation and is it followed?

Simplicity matters. Fees need to be presented in a way that clients can understand. Doing so engenders trust and an appreciation of the value of the services and products the advisor offers.Part One of this post expressed the conflict that exists between fees charged based on the client’s ability to pay versus the actual services rendered.  Does an advisor spend more time providing services to a client investing $5 million than $3 million and if the fee is 1% is it really worth $20,000 more per year?

There are several concepts in play when deciding on the right pricing.

  1. First and foremost, align your fees with your services.
  2. Set fees that promote your value to clients.
  3. Simplicity amplifies transparency.
  4. Fairness is key.
  5. Discover additional profit centers.
  6. Construct a fee structure that mitigates conflict of interest issues.

The right pricing will enhance the value of your firm and can produce a sustainable practice model.  Take the time to re-evaluate how you charge to get the biggest bang for the buck for you and your clients.

For help in determining the right fee structure for your firm email us at

*The new Schwab automated investing option which is sold to the public as free is, a many of you already know, not really free.  The recommended investments are either Schwab proprietary funds or ETFs which have internal management fees or are revenue sharing investments from other firms.  So Schwab makes money from the client albeit not in as transparent a way as it should be.