Pricing pressure encourages new revenue models

This year, the industry was abuzz with predictions of how online-only advisers, passive investing and the next generation are going to change the advice business.

While industry observers still are debating whether those developments will force financial advisers to change what they charge, some advisers are already tweaking what and how they charge.

To stay ahead of pricing pressures, some firms are already moving past a basic fee on assets under management as they test new revenue models, including charging a fee on net worth or billing more along the lines of an attorney with annual retainers and hourly fees.

“The issue is that many advisers are only charging on one very small component of their overall value proposition, which is a percentage of assets under management model,” said Thomas Nally, president of TD Ameritrade Institutional. “That is really a legacy from when a lot of advisers were just money managers, but over time they have expanded the scope of their services.”

Mr. Nally suggested advisers could charge on a client’s net worth or total wealth rather than on the invested assets. The fee remains the same in terms of total revenue, but instead of charging 100 basis points on $1 million in investible assets, the adviser may charge 25 basis points on $4 million of total net worth, Mr. Nally said. That may help clients better compare services when given the option of an online advice platform that charges 25 basis points, he said.

“If the value as perceived by clients is in the wealth management and the financial planning … we shouldn’t be billing on the tiny [investment management] slice that’s becoming more and more commoditized,” Mr. Nally said.

HOURLY FEES

Other firms, such as those in The Garrett Planning Network Inc., are using hourly fees and retainers to appeal to the middle class and next generation. These groups have been underserved by traditional investment firms and consider being charging on assets unaffordable.

“We’re not promoting one idea over another,” Mr. Nally said. “We just need to step back and rethink the way we’re charging so we get credit where the value really is.”