Asset-based fees falling out of favor

Fees based on assets under management may be going the way of commissions.

The trend now is toward retainers, hourly rates and various forms of a la carte payments for financial advice, according to industry analysts.

After pushing for payment in fees for the last few years, independent advisers are evolving toward new payment plans as the demand for new kinds of services mounts.

The transformation also is being driven by the economics of the nearly three-year bear market and the need to compete with increasingly fee-based wirehouses, according to experts.

“I don’t think the dollar amounts [advisers charge clients] will be changing, but the packaging of the services and the way they are priced will be changing,” says Mark Hurley, CEO of Undiscovered Managers LLC in Dallas. “It’s a logical thing. There’s just no rational reason to be charging clients based on a percentage of their assets.”

Mr. Hurley compares the pricing evolution to the way medical doctors treat and charge their patients.

“When you go to see a doctor, they don’t ask you your net worth,” he says. “They treat you and send you a bill for the service.”

Just as commission-based brokers gradually have given way to fee-based advice, the industry now may be adjusting to an environment in which taking a more holistic approach to pricing and services makes more sense.

`More holistic’

Harold Evensky, managing principal of Evensky Brown & Katz in Coral Gables, Fla., says that after several months of consideration and preparation, his firm recently starting shifting away from asset-based fees and toward more retainer fees.

“The flat retainer fees are particularly designed for clients who have business with us that’s outside of money management,” he says. “We see this as part of our becoming a more holistic practice.”

Mr. Evensky, whose company oversees about $350 million in client assets, says most of his new clients are accepting the retainer-fee option. In some cases, he says, the fee-based option isn’t even presented to new prospects.

Matthew McGinness, a consultant at Cerulli Associates Inc. in Boston, has written a research report on the registered investment adviser that includes a perspective on how “fee structures are in flux.”

“The services being provided are going beyond just asset management, and advisers are trying to align fees accordingly,” he says. “If an adviser is spending more than half his time providing advice and services beyond asset management, it makes sense to take the focus off of asset management.”

Mr. McGinness points out that as advisers continue to focus on their clients’ “entire financial picture,” somehow putting on a price on the extra services being provided will be important.

Otherwise, he says, advisers risk devaluing their services by essentially giving them away. He draws the analogy of a street vendor selling hot dogs.

“At what point would a hot dog become so cheap that you started to question the quality of it?” he says.

Mr. McGinness estimates that only about 3% of advisers have begun to experiment with fee-structure options that include retainer fees and hourly rates.

Comparing it to the gradual transition by the major wirehouses away from commissions and toward fee-based advice, Mr. McGinness says, “It’s more of an evolution than a revolution.”

Ironically, it is the broad acceptance of fee-based pricing by the wirehouses that is considered among the factors driving fee-based independent advisers toward the next generation of fee structures.

As Mr. McGinness writes in his report, the wirehouses’ embrace of asset-based fees has created a difficult environment for independent financial advisers.

“The [independent] advisers can no longer differentiate themselves on the basis of how they charge for their services, so many are spending more time emphasizing the services they provide,” the report states.

Burton Greenwald, a Philadelphia financial services consultant, says advisers are turning to more-varied fee structures as a result of a “double whammy” that includes a decrease in revenues due to the down market and an increase in client turnover.

running scared

“This is an outgrowth of everybody getting squeezed,” he says. “I think advisers are being much more opportunistic because they’re trying to build any kind of revenues right now. And they are willing to take on the one-time [financial plan] transaction with the hope that it will lead to more business.”

Glen Buco, executive vice president at West Financial Services Inc. in McLean, Va., says flexible pricing equates with a competitive advantage.

“As advisers, we need to be more proactive and offer a higher level of service,” he says.

West Financial, which oversees about $450 million, has never worked on a commission basis, but the company recently started offering clients hourly rates and retainer fees for people who want more advice than asset management.

“We do still have asset-based relationships, and some relationships could be a combination of asset-based and hourly fees,” he says. “I think there’s actually more of the a la carte and hourly pricing than we would prefer.”