Advisers are adopting fee-for-planning models — and charging accordingly

This year has pushed advisers to embrace financial planning to help clients navigate volatility caused by COVID-19, and while more investors are engaged with planning, advisers are also changing the way they charge fees on those services. 

Today, 72% of advisers have adopted some type of fee-for-planning model, according to Envestnet MoneyGuide’s study of more than 1,600 advisers fielded in September. Almost 38% of advisers are charging a separate fee for planning services, while 32% charge via AUM. Among the advisers that charge a separate fee, the majority charge a flat fee (65%) followed by hourly (18%) and subscription (8%). 

Clients are also more likely to use financial plans than in previous years. More than half (55%) of advisers’ clients have a financial plan with a greater demand for comprehensive planning (46%) compared with modular planning (11%), according to the survey. 

And with the uptick in demand also comes increased fees. The flat fee average is up to $2,482 from $1,696 in 2015. Hourly is up to $257 from $208 in 2015. Subscription is about $50 a month in 2020, according to the study. Separate research conducted by Kitces.com also found that advisers charge a flat fee of $2,400, on average, for a financial plan.

“We are seeing an increase in the number of clients with a plan along with the steady rise of fees; this suggests there is a demand for advisers to offer and expand their financial planning services and clients are willing to pay for it,” said President of Envestnet MoneyGuide Tony Leal. 

Traditionally, advisers charged based on AUM which typically limited their client base to high-net-worth investors. Now, advisers are moving away from bundling the plan into the asset-based fee and charging a separate fee to open up planning for more investors. 

Yet, advisers are not totally set on the best way to charge for their services. About three in ten (29%) who are currently charging for these services, either through a fee, AUM or commission, are considering implementing a different fee model in the next 12 months. 

For example, of those advisers wanting to make a switch, 44% are now considering implementing a subscription model in the next 12 months, according to the survey. 

However, there has been debate about whether a flat fee or subscription model will make advisers as much profit, according to Joe Duran, head of Goldman Sachs Personal Financial Management.

Duran said, during the InvestmentNews’ FinTech Virtual Summit in October, that when he asks clients which model they prefer, they say they prefer to pay an ongoing management fee as a percentage. “I suspect there will be models to try this, I don’t know how they’ll ever make money,” he said.  

However, there is potential for more segmentation with smaller clients that could prefer subscription fees, Duran said. Financial planning expert Michael Kitces, concurred, saying subscription models will probably live in a space of people that have a couple million dollars, which is a small percentage of the population. 

“If you do a sizing on the marketplace, there’s 120 million households and only about a third of them have at least $100,000 of investable assets, and only about one in 10 of those have at least a million dollars of investable assets,” he said. “So when we talk about the AUM model, we’re basically talking about a model that serves about 4% of the population.” 

However, Kitces said he wouldn’t be surprised if the dominant model ends up being subscription fees — not because it displaces an AUM model — because it makes the observable pie of clients much bigger. 

“I would envision a future where AUM does fine with AUM clients,” he said. “But it may no longer be the dominant model simply because subscription fees grow with so many other clients we don’t even serve yet.”

An earlier version of this article incorrectly stated the number of households as 200 million in a quotation. The correct datapoint is 120 million households.