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Revisit Advisor Fees to Stay Profitable

By Emily Brower Auchard December 13, 2016

In the face of emerging external pressures such as robo-advisors, the Department of Labor’s new fiduciary rule, and clients’ increased service expectations, many advisors are taking a second look at their fee structures. The key to remaining profitable in these potentially challenging times, according to advisors, is to ensure fees -- whether for planning or based on AUM -- are commensurate with the services provided.

“People are busier and busier which means clients are asking for more and more service,” explains Mark Germain, founder and CEO of Beacon Wealth Management in Hackensack, N.J. Germain, whose firm manages $250 million, says clients today ask for help with everything from restructuring their children’s student debt to managing the sale of a deceased parent’s home.

To support these increased servicing needs, his firm has started to separate out the fees they charge for planning from the fees tied to managing money; they had combined both fee types since the 2008 financial crisis. The firm’s advisors are explaining the new planning fee structure to clients at their annual meetings and educating them on how they spent their time servicing their accounts over the past year.

“So far, we haven’t had any kickback or concern from clients,” he says.

The new planning fees have already proven to be both profitable and successful with clients. For instance, when a client with a home to sell wanted to take the proceeds and pay off their children’s college debt, Germain and his team came up with an alternate plan that let the couple – two working doctors – invest the money instead of paying off the loans. With the firm’s new upfront planning and ongoing monthly fees covered, Germain’s team was able to spend the time required to create a plan and help manage the transaction without sacrificing profit.

Matt Cosgriff, a financial advisor with Minneapolis, Minn.-based BerganKDV Wealth Management, says financial planning can provide particular value to younger clients, and advisors should understand how to charge such a client base. The firm, which manages $1.4 billion, recently started a new service aimed at next-generation clients. Coming up with an appropriate fee structure for this less-affluent demographic required a flexible approach, one more focused on the specific needs of younger clients, notes Cosgriff.

Matt Cosgriff

“While the vast majority of advisors operate on an AUM fee structure, it just isn’t profitable when clients have less than five hundred thousand to invest,” explains Cosgriff. He and his colleagues finally decided on a service that includes a fee for planning services but relies on a robo-advisor for managing client assets.

“The value of investment management is going down and the value of financial planning is going up,” says Cosgriff. “In five years, I believe we’re going to have a much more hybrid fee model as opposed to the strict AUM structure.”

Brian Lampron, director of advisory services for Commonwealth Financial Network, works with advisors to help evaluate and revise their fee structures. While about 80% of Commonwealth’s advisors charge recurring AUM-based fees, many of those fees vary in rate from client to client.

“An advisor can have 12 households with one million each and be charging a spread of fees between 60 basis points and one and a quarter,” he explains.

Lampron advises the elimination of fee inconsistency to improve the client service advisors provide as well as their profitability.

The problem, according to Lampron, is that most advisors are uncomfortable talking about fees with clients – particularly when raising those fees. But advisors are spending a lot more time servicing clients because products are more complex and life is more complex. Without an increase in fees, they aren’t getting paid for the extra work.

To grow, advisors need to be paid for the services they provide. The first step, says Lampron, is to analyze how much clients are paying and what they are paying for. Next, create a new fee schedule that actually compensates advisors for their time and effort. Then comes the hardest part: communicating the new fees to clients.

“Explaining why they are making the change from a business standpoint and from their desire to continue servicing clients at the same level, the conversation will go better than they think it will,” he predicts.