Advice-only fees gain traction as advisers opt out of managing client portfolios

Asset-based pricing still dominates in wealth management, but the trend is moving away from charging clients based on portfolio size.

The trend toward increasing commoditization of investment management, boosted by broad-scale adoption of robo-advice platforms and dirt-cheap ETFs, continues to drive innovation among financial planners looking for new market opportunities.

While it might go against the grain of popular thinking in wealth management, the concept of charging clients for advice only, without any portfolio management services, is gaining appeal.

Daniel Galli, owner of Daniel J. Galli & Associates, first tested the waters a few years ago by offering an advice-only option for prospects who have most of their money inside a retirement plan or have someone else already managing their investments.

While the bulk of his business is still planning and investment management for an asset-based fee, he has had to hire three people to handle the advice-only side of the business.

“I experimented to see if there was demand for advice, and it is obvious there is a need for this, so I made the decision to go all-in,” Galli said.

Unlike asset-based fee models, which vary by a few basis points and might have discounts for larger accounts, the fees in the advice-only space show plenty of creativity.

“We developed a pricing tool that is based on what we’re going to deliver because not everyone needs the same thing,” Galli said. “We use a tool which determines how many hours we’ll be putting into the plan, then we come up with a flat fee based on a price of $250 per hour.”

Galli said the one-time planning engagement, which typically lasts between three and six months, can range from $2,500 to $7,000.

Cody Garrett, founder of Measure Twice Financial, describes himself as an “outspoken cheerleader” for advice-only planning.

His practice is specifically tailored for do-it-yourself investors who are comfortable with the portfolio management side but need help with the planning around everything from when to take Social Security and Roth IRA conversions to more complex estate planning needs.

“I serve DIY investors who are on a path to early retirement, and they feel comfortable managing their own investments,” said Garrett, who charges $6,400 for a “three-month comprehensive plan.”

While he doesn’t do portfolio management, he will guide clients on how to open a brokerage account and get started.

“The advisers I talk to spend two to four hours a year, per client, doing the technical part of managing investments,” he said. “You used to have to use a broker to buy mutual funds, now anyone can buy ETFs on their phone.”

Garrett believes the advice-only model will continue to slowly take share from the asset-based fee model as more investors start to recognize the commoditization of portfolio management.

“Advice only will serve the DIY community and a flat fee for investments will serve delegators,” he said. “I don’t think asset-based pricing is going away but I think it’s going to fade.”

Knut Rostad, president of the Institute for the Fiduciary Standard, said separating investment management from financial planning services “is absolutely a step forward.”

“Drawing a line between investment management and all other financial advice makes sense to me,” he said. “Both implicitly and explicitly, it focuses on the value the adviser is bringing to the client. That is all positive.”

Rostad is most enthusiastic about the way some advisers are moving away from fees linked to investments because “it should increase investor understanding about what they’re paying and for what services,” he said.

While transparency might be among the reasons proponents like Rostad support fees that are disconnected from client assets, the asset-based pricing model still dominates the wealth management space.

According to data compiled by InvestmentNews, more than 90% of advisers currently use some form of asset-based pricing, while flat fees are used by about a quarter of all advisers.

Diane Pearson, founder of Pearson Financial Planning, has been in the wealth management business for 33 years and has gone from commissions to asset-based fees to flat and hourly fees.

The main driver toward charging fees not tied to investments, she said, is being able to work with clients who might not have a lot of money to invest but still need financial planning help.

“It’s about helping those that have lesser amounts of savings, because they have nowhere else to go,” she said. “I have a lot of clients that already have Betterment accounts and are asking me to just take a look. But I’m not selling them on moving their money over to me so I can manage it.”

Mike Zung, owner of Java Wealth Planning, doesn’t fit the advice-only definition because he will manage client portfolios, but his fee is not set based on or tied to investment performance.

“My fee stays the same whether I’m managing the investments or not,” he said.

Zung sets his flat fee for each client based on things like complexity and total portfolio value. Most of his clients work in the technology sector where much of their wealth is tied up in stock options, so an asset-based model would not be practical.

“I don’t do the classic AUM model because I don’t want to require a client to move their money if they’re not comfortable moving their money,” he said. “I feel like the trend is away from the actual investment management side of it because people are feeling more comfortable doing that part of it. But they’re looking for guidance on their overall financial picture.”