One Size Doesn't Fit All

Want to grow your business? Cut the fees on some of your services, and while you're at it, charge more for others.
John Shepherd/iStock/Thinkstock

It may seem like a simple notion, but advisors beholden to the 1% fee schedule often have trouble even conceiving of another way of being compensated.

In fact, advisors have long been overcharging clients for some services, such as ongoing investment management. At the same time, they’ve been vastly undercharging for other time-consuming, value-added services, such as financial planning, philanthropic planning and family governance, as well as serving as a trusted advisor who prevents clients from making emotional decisions.


Long-Term Upside

Because wealth advisory is an increasingly commoditized business, customizing fees based on the actual services a client uses could have a huge long-term pay-off for a variety of reasons.

First, a more transparent, client-friendly fee structure is the kind of word-of-mouth marketing that rapidly grows any business, but particularly wealth advisory, which thrives on personal referrals.

Second, an individualized fee schedule would be a total differentiator. In today’s ‘me-too’ marketplace, advisors need a way to differentiate themselves from other RIAs, as well as robo advisors who are eating into their business.

Third, it’s simply the right thing to do. Most clients reluctantly agree to pay the same fee in perpetuity, even though they know their advisor may be doing very little after an initial flurry of activity.


Trapped By An Old Model

Wealth advisors, like real estate brokers, are holding on to their outdated fee schedule of 1% and 6%. Advisors’ infatuation with the 1% fee structure, however, has blinded them to the obvious: Customizing their fees just like they do investment solutions.

To do so, advisors should price their services according to the major services they provide:


  • Investment consulting
  • Financial planning and wealth transfer, including philanthropy and family governance
  • Relationship/behavioral management



Investment Consulting

Investment consulting is the essential deliverable of all wealth advisors.

It’s a very front-end loaded process. New clients consume an inordinate amount of time as advisors figure out their goals, risk tolerance and appropriate investment vehicles.

This process leads to the next time-consuming exercise – the asset allocation. There’s no question that asset allocation is the most important investment decision, but effective asset allocation is an iterative, and also time-consuming, if performed correctly.

After all that, the investment implementation can take two paths: Active management or passive management.

Active management is significantly more expensive to the client and the advisor’s firm. It’s costly to continually identify top-tier managers and conduct due diligence. Advisors should be compensated more for finding active managers who outperform the market on a risk adjusted basis, even if the evidence shows that consistent outperformance is unlikely.

Passive money management through ETFs and other low-cost vehicles is clearly less expensive, but with the proliferation of ETFs it, too, requires expertise. As a result, fees should be lower.

So here’s one possible approach: A declining fee for investment management. Year 1 is the most labor-intensive and should command higher fees, but Year 2 should be lower. In Year 2 and beyond, the fee would remain flat.


Financial Planning and Wealth Transfer

Some people simply don’t need financial planning, philanthropic planning or family governance services. Many people don’t have the wealth or may not be at that point in their lives when they need more sophisticated services.

But many clients do, and those services are extremely valuable to them. Advisors should be compensated accordingly.

One approach is charging for financial planning and wealth transfer services on a project basis. When clients need these services, an advisor’s advice and experience can have impact for generations to come. There’s no question advisors should be paid more for these services, but they often undercharge for them.

Conversely, if you’re not using a service, why should you pay for it?


Relationship/Behavioral Management

Relationship and behavioral management is critical, and it is a key service that separates living, breathing human advisors from robo advisors.

Human advisors really do earn their fee. The best advisors become part of a client’s inner circle – a first among equals because of their domain expertise.

A single piece of advice could be worth millions or impact many lives. Equally as important, advisors often help clients avoid big mistakes, like selling in the depths of the financial crisis or preventing a client from pouring all of their retirement money into a friend’s start-up.

An advisor should be justly compensated for providing ongoing advice, as well as on an asset-based fee schedule.

On the other hand, many people don’t want or need that advice. For those clients, they should probably be self-directed or opt for a robo advisor.


The Bottom Line

Customized fee solutions are an advantage unique to independent wealth advisors.

Could you imagine Merrill Lynch doing this?

For a customized approach to work, it must be applied to both current and new clients. The immediate result is that some clients will get a fee reduction. Over the longer term, advisors will grow revenue by winning more clients and additional assets from current clients.

Customization will also minimize fee negotiations and discounts. People negotiate when they believe fees are too high. A customized fee schedule should resolve those concerns.

The bottom line is that a customized, more transparent fee schedule will lead to clients who are happy to refer people.

And, put another way, in a commoditized world, how are you going to succeed if you look like everyone else?



Jeff Spears is Founder and CEO of Sanctuary Wealth Services and author of the blog, Wealth Consigliere.  Follow Jeff on Twitter and Facebook.


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