Advisers shift away from AUM fees to better serve clients

NAPFA members debate which pay structures resolve conflicts and other concerns

May 14, 2015 @ 1:14 pm

By Liz Skinner

Fee-only financial planners are shifting away from charging clients based on a percentage of assets in search of models that are free of conflicts, allow them to serve more clients and pay them for the work they do, not market performance.

“We just feel it makes zero sense to throw in your core competencies for something else that is pretty darn easy to get,” Roy Diliberto, founder of RTD Financial Advisors, said Wednesday during a panel discussion at the spring National Association of Personal Financial Advisors conference in San Diego. “You can get asset management service for a lot less than 1% at lots of other places.”

Since 2002, RTD Financial has charged clients a retainer that is based loosely on assets, but stays set for a number of years so fees won't swing based on market performance.

Other planners worry that charging fees based on assets under management — still the method for the majority of fee-only advisers — creates a conflict of interest when they are asked to recommend whether a client should pay off their house, invest a bulk of assets in a business or make some other planning decisions.

Still other advisers worry the AUM model makes it impossible to earn a living and serve clients who don't have much to invest — the type of client who most needs planning and budgeting help from an adviser.

“I was sending a lot of people away,” said Mark Berg, who left an established firm 15 years ago that based fees on AUM to create his firm Timothy Financial, which charges clients by the hour.

“The need is massive,” he said.

(More: Pay models evolve beyond 1% of AUM)

Mr. Berg told advisers at the NAPFA session that before he made the switch, he was sending eight out of 10 prospects away because they didn't have enough assets to meet firm minimums. Today his firm of four advisers serves about 400 clients, and not only small investors, showing the model can work for clients of all sizes.

The last three clients that Mr. Berg personally began serving were worth $33 million, $120 million and $100 million, he said.

The debate over whether basing fees on AUM is what's best for clients has heated up since February, when President Barack Obama highlighted the work of Sheryl Garrett, founder of the Garrett Planning Network, which charges hourly for financial advice.

While 95% of investment advisers set fees based on AUM, according to the 2014 InvestmentNews Financial Performance Study of Advisory Firms, several other compensation methods are gaining traction. These models are especially popular with new and young advisers who don't want to join most of the industry in targeting wealthy individuals and families.

Some advisers in the audience Wednesday asked whether NAPFA itself is turning against AUM-based fees.

Geoffrey Brown, chief executive of NAPFA, said later that his industry group has the room to support firms using all the different fee-only models. He said the discussion, however, shows the need for more research into how many of his members are using different fee models and whether the trend is moving away from an AUM-based fee.

“We need to keep this discussion going,” he said.

(More: To compete with robo-advisers, Nally proposes charging clients for all services)

The moderator of the panel wasn't shy about his own opinion that the industry is turning away from AUM fees and will continue to do so.

“Within the next five years I think you'll see advisers migrating to something else,” said Bob Veres, publisher of Inside Information.

David O'Brien of O'Brien Financial Planning, a conference attendee, said he moved his firm to a retainer model four years ago because he didn't think he should be paid differently depending on how the stock markets performed.

“If the market's going up or down, I'm not doing anything different,” he said. “I don't think the AUM model will last.”

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