Fee pressure has RIAs considering moving from AUM to retainer model

Asset-based pricing still rules, but retainers are expected to gain ground

May 26, 2017 @ 2:00 pm

By Jeff Benjamin

As investors become increasingly cost conscious and more savvy about fees, some financial advisers claim to be poised to field any and all challenges by embracing a retainer-fee model.

Unlike the more popular model of charging clients based on assets under management, the retainer, or flat fee, structure places more emphasis on planning and less on investment performance. Retainer fees also allow advisers to work with younger clients and those who don't have a lot of assets.

"I have some clients without a lot of money, but they require a lot of work on the planning side, and on the flip side I have clients with a lot of money who don't need a lot of planning work, so it's not right to be charging based on assets," said Carolyn McClanahan, founder and director of financial planning at Life Planning Partners.

Ms. McClanahan, who adopted the retainer-fee model in 2006 after two years of using the more traditional AUM model, sets annual retainers based on the complexity of the client's financial situation.

Her annual fees range from $10,000 to $50,000, and those fees are adjusted as the complexity of a client's plan changes.

"The most difficult challenge we have is explaining retainer fees to clients who are used to asset-based fees, but we can usually show them how they would be paying more under an asset-based structure," she said.

According to the most recent benchmarking study from Fidelity Investments, about 98% of advisers still use asset-based pricing, while retainer fees are used by just 8% of advisers.

Market forces, including increased regulatory oversight and growing fee pressure coming from the rise of robo-advice platforms, are pushing more advisers to at least consider retainer fees, according to Mathias Hitchcock, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions.

"Retainer fees should initially rise in popularity as investment management fees become more commoditized and firms seek to target new client segments," he said.

Like most fee structures, retainers are highly customizable. Fidelity separates them into two main categories: comprehensive retainers that include multiple services, and retainers that are priced based on specific services.

Fidelity's research shows that the median retainer fee charged is $5,000 annually.

Veteran advisor Tim Holsworth, president of AHP Financial Services, which manages $180 million, is in the majority and plans to keep charging clients based on assets.

"I almost never use retainer fees," he said. "It doesn't fit out business model, and I think it's very hard to make a living on advice only."

But advisers who have embraced retainer fees typically find the pros outweigh the cons.

"My clients like retainer fees because they don't feel like I'm trying to sell them something," said Darin Shebesta, vice president at Jackson Roskelley Wealth Advisors.

"I love it, and I believe it is the future of our industry," he added. "We charge one flat dollar amount and we do everything, including the asset management."

Mr. Shebesta charges an initial fee starting at $2,500, then an annual retainer that can go as high at $3,000 per year, depending on the complexity of the account.

"It's something I started to pick up when I started working with the next gen clients, because a lot of that group doesn't have the assets to necessitate asset-based fees," he said. "It also takes away that conversation with clients about fees when the investment account is down."

Proponents of retainer fees often acknowledge the potential limits on revenue, since fees don't go up in stride with the investment portfolio the way they do when clients are charged based on AUM.

"You can only work with so many clients, so, logically, you can cap your revenues by charging retainer fees, unless you keep raising your fees," said Roger Ma, owner of the advisory firm Lifelaidout.

Mr. Ma, who launched his business last year, charges clients an initial fee of between $1,000 and $5,000, then a monthly retainer of between $100 and $500.

"Charging a retainer puts your fees where the value is," he said. "I just don't agree that if you're able to increase the assets the client should pay higher fees."

For Kristi Sullivan, owner of Sullivan Financial Planning, retainer fees make sense for the clients, but it does increase the risk of a client leaving once the initial plan is set up.

"I offer an annual retainer to clients after an initial financial plan, which includes plan updates, meetings and unlimited calls to me for questions and advice," she said. "The pros are that the client has a follow-up beyond the original plan. But the income can become less predictable because once people are on a good path they might feel like they don't need the retainer after a year or two."

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