Adviser explains why and how to move to a retainer model

The latest in our Adviser's Consultant series examines the best way to wean a firm off AUM-based fees

Oct 6, 2015 @ 4:36 pm

By Liz Skinner

Scott Kahan concluded 13 years ago that the amount his financial advisory business charged clients shouldn't change based on market performance, which is what occurs when client fees are based on assets under management.

The adviser, founder of Financial Asset Management Corp., also felt there was a conflict of interest in situations where clients asked the firm's advisers whether they should invest in a home or business that would significantly decrease their overall AUM.

A third reason Mr. Kahan changed the firm's fee structure in 2002 to a retainer model was to encourage clients to trust the firm with all their assets. The amount charged is based on a client's total investible assets and remains the same for three years. Mr. Kahan figures clients who keep assets with another adviser will be paying two people to do the same job.

"We don't do part of the money today," Mr. Kahan said. "We got tired of making recommendations about assets that clients had with other professionals, and then no one following that advice."

(More: Advisers shift away from AUM fees to better serve clients)

The fee structure has been tweaked occasionally since that change in 2002. Today, Financial Asset Management's clients with $3 million in investible assets, not including real estate or businesses, pay an $8,500 initial fee and $4,250 per quarter after the first six months. That expense covers full financial planning, investment analysis, insurance review, tax, retirement and education planning.

Their ideal clients have $2 million to $5 million in investible assets. But the firm also helps young professionals who have less wealth, usually under $200,000, with financial planning services only. Those clients are charged $2,500 upfront and $375 per quarter after six months.

"Clients love the pricing model because they know what they're paying and what they're getting," Mr. Kahan said. "Advisers won't take a hit in revenue if you do it properly."

In all, the Chappaqua, N.Y., firm manages about $170 million in assets from about 140 clients.

Founded in 1986, the firm turns away clients if they really don't need many of the services covered by its fees. For instance, if most of a client's assets are held in 403(b)s and there aren't many choices within those accounts, it wouldn't be worthwhile for the client to work with the firm, he explained.

There are business benefits to making the pricing model switch. Most significantly, it serves to steady cash flow, Mr. Kahan said.

(More: The makeup of independent advisory firms has fundamentally changed)

He pointed out that in 2008-09 when markets tanked and advisers who charged fees based on AUM saw significant revenue drops, his firm experienced a slight increase.

"We offer concierge services and it's a differentiator among other advisory firms," he said.

The annual fees at Financial Asset Management are recalculated every three years based on the client's total investible assets at that time. They tend not to change much for retirees, but they can increase significantly if someone receives a large inheritance or if professionals have received and saved large bonuses over that three-year cycle, he said.

Tip sheet:

• Before making a switch to the retainer model, back-test to see how that change would have affected revenues at various times.

• Keep legacy clients on the old model initially and begin the transition by applying the retainer to new clients.

• Move legacy clients over to the new pricing model in small lots at a time.

• Write into the contract that clients sign with the firm how often the fee level will be adjusted and how it will be changed.

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