No Fee Flexibility? Then You Risk Getting Stiffed
While the asset-based fee compensation model has its merits, it doesn’t always cover the extra services financial advisors provide their clients, Jeff Magson of the consulting firm 1st Global writes in CNBC.com.
Instead, advisors should charge a combination of fees depending on what they provide, he writes.
Advice fees based on assets under management have become the biggest source of revenue at most practices for a reason, according to Magson. The one-time fee-for-service model and the commission-based model don’t adequately compensate advisors for the ongoing work required to provide a top-notch financial planning experience. But the asset-based fee model ends up aligning the advisor’s hard work with market conditions.
When advisors are most in demand -- during bear markets -- they effectively earn less than during bull markets, when demand for their services is low, says Magson. What’s more, he feels the comprehensive guidance advisors offer in tax, education, retirement and estate planning deserves compensation on top of the asset-based fee.
To determine what and how to charge for their services, advisors should assess factors such as the percentage of time they spend monitoring investments and, separately, the time they spend discussing other aspects of financial planning, he writes.
This will help advisors understand whether their hourly fee is adequate, or make them realize that they should tier their fee-based services according to complexity, writes Magson. And to deliver advice properly and profitably, advisors should look at a mix of asset-based and fee-for-service pricing models.