RIAs should charge fees tied to net worth: TD’s Tom Nally
Advisers aren't placing a value on financial planning services when their fees are based solely on AUM.
Registered investment advisers should charge fees based on their clients’ net worth instead of the size of their investment accounts, according to Tom Nally, president of TD Ameritrade Institutional.
Charging clients solely based on the amount of their investible assets ignores the financial planning services that RIAs provide beyond investments, such as advice on their taxes, mortgages, estate planning, or how to structure their small businesses, according to Mr. Nally.
“It’s like getting a haircut, but you pay for the shampoo and the haircut is free,” Mr. Nally said Wednesday during an interview at TD Ameritrade’s elite adviser summit in Dana Point, Calif.
Simply assessing a client’s tolerance for risk and assigning an appropriate asset allocation model has become a commodity, and a service sometimes provided by low-cost robo-advisers. That’s putting pressure on fees across the industry, prompting RIA firms to come up with a business model that embraces technology but also manages the many other details of a person’s financial life.
(More: RIAs are losing their competitive advantage)
Taking a small percentage of a client’s net worth, say 20 basis points, would better reflect the comprehensive wealth-management services RIAs provide, according to Mr. Nally. Many advisers charge 1% of assets under management, missing the value of all the other guidance they offer, he said.
RIAs are facing fee compression at the same time that compliance costs are rising due to increasing regulatory scrutiny. Financial advisers must begin the first stage of complying with the Labor Department’s new fiduciary rule as soon as next year.
The regulation, which requires brokers and RIAs alike to provide advice that puts their clients’ best interests ahead of their own, has leveled the playing field for retirement accounts. While the Securities and Exchange Commission has long required RIAs to act as fiduciaries, they can no longer tout that high standard is theirs alone as they seek to grab retirement assets from the brokerage industry.
The rule should also lead RIAs to consider what differentiating services they provide, as well as how they charge for them.
After the Labor Department released the fiduciary rule just a couple months ago, RIAs are having a harder time articulating how they’re distinct from the competition, Mr. Nally said.
Learn more about reprints and licensing for this article.
