Charging flat fees helps advisors explain their value to clients, many of whom don’t understand what they are paying for in the first place, according to industry executives.

It's "critical” for advisors to have simple fee structures and be able to explain them well to clients, said Jenn Anderson, head of advisor engagement at Hightower Advisors.

“The more succinct and clear a firm can be on the services to be expected and the fee for those services, the higher degree of success they will have in converting the prospect into a client,” she said.

Most clients working with an advisor don’t know what they’re being charged, according to a study released earlier this year by State Street Global Advisors. For example, 60% of investors who work with advisors that State Street surveyed incorrectly believe that fund fees are included in the fees they pay an advisor or an investment platform. And just 24% of advised investors say they “completely” understand the concept of an expense ratio.

Hightower’s Anderson said advisors “must feel confident” in the value of the services they provide as well as the value the clients assign to those services so they can explain them better.

Jenn Anderson
“The trend towards flat fees is indicative of this need to be clear,” she said.

Around 26% of the 1,000 registered investment advisor firms that use the platforms of technology provider Advyzon charge a flat fee for their services in some capacity, according to the firm.

Fee transparency only get more important as advisory firms tailor their service offerings to meet the demands of the next generation of clients, according to Hightower’s Anderson.

Hightower predominantly furnishes investment advice through discretionary advisory services, which are offered through an unbundled or bundled fee program, according to the firm’s March 31 regulatory filing with the Securities and Exchange Commission. Hightower also has a wrap fee program through which it offers portfolio management services, according to the filing.

Clients generally have a choice of how fees will be calculated for services, and these options include a percentage of client assets, hourly charges, flat fees and other retainer or service fees, or some combination of those options, the filing notes.

Advantageous for FAs

Jacksonville, Florida-based registered investment advisor firm Sterling Newton started charging clients a flat fee around six years ago. Before that, the firm was charging clients a percentage of the assets in their accounts.

“As we started to explore level fees, it started making sense because our level of service has to maintain the same regardless of the type of economy,” according to Bill Newton, the firm’s president.

Before making the transition to flat fees, Newton was “having difficulty justifying why clients’ fees were going up” under the percentage of assets model.

Charging flat fees is also advantageous for the advisory firm because the percentage of assets model tends to be impacted by market performance, Newton notes.

The percentage of assets fee model is “a bunch of hogwash.”Bill NewtonSterling Newton
“If your portfolio goes up, our fees go up. If your portfolio goes down, our fees go down. And if you really examine that theory, it’s a bunch of hogwash,” he said.

While strong market performance drives fees higher in that model, poor performance reduces them.

“The advisor can’t control the market, and he still has expenses that he has to pay for,” Newton said.

When an advisor’s fees are going down, “there’s a good chance” that “their service level would have to go down as well,” according to Newton. That’s what happened during the 2008 global financial crisis when advisory firms had to cut back on staff, for example, he said.

Meanwhile, advisors are also increasingly charging separate fees for their financial planning work, driven by a range of factors from improved payment processing to a desire for more stable revenue streams. A September 2020 survey of more than 1,600 advisors by Envestnet MoneyGuide found 38% of the respondents charge a separate fee for financial planning. Of those, 65% charge a flat planning fee, while 18% bill by the hour, and 8% charge by subscription.

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