State-registered advisers face fee model inconsistencies

New financial advisers are finding strange discrepancies between states in terms of the way regulators are allowing them to charge their clients fees for services.

They have found that some states will not allow them to charge a client both a fee based on assets under management and a flat fee, even though they will allow firms to charge clients one or the other. Other states, such as Utah, tell advisers that fees based on net worth are not acceptable, said Michael Kitces, partner and director of research at Pinnacle Advisory Group Inc. and co-founder of the XY Planning Network, which is holding its third annual conference in Dallas this week.

“We are seeing huge disparities in how states interpret ‘unethical business practice’ rules when advisers register their firms,” he said in an interview.

XYPN, a network of fee-only advisers aimed at serving Generation X and Y clients, helps new firms file their registration documents with state securities regulators, which oversee firms with less than $100 million in assets under management. The 489-member network has helped more than 200 firms register their advice businesses with states in the past three years.

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Utah regulators had an issue with charging clients a fee based on the person’s net worth because it would charge one client more than another for seemingly the same services, said Alan Moore, XYPN co-founder, who traveled to Utah to meet personally with regulators there.

They also told him that fees based on client income or complexity of the client’s financial situation would not be allowed.

The state publicly has said hourly fees that vary or can be negotiated could be seen as unreasonable, and fees that are nonrefundable or are paid just for the adviser’s availability may be not be allowed.

In other states, regulators rejected a firm’s plan to charge clients a monthly fee based on AUM and a one-time planning fee.

“The state said the firm can do all of either, but they felt like it was double dipping if they charged both,” Mr. Kitces said.

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Multiple state regulators also have questioned whether charges above $150 a hour can be considered reasonable compensation for a fee-only adviser, even though some AUM-based advisers could generate two or three times the revenue per hour, Mr. Kitces said.

The network’s leaders are encouraging the North American Securities Administrators Association to develop a model rule to help alleviate the differences. States would still individually have to adopt any such rule.

“State regulators have a strong interest in investor protection, and that includes ensuring that fees are fair and for services that provide value,” said Bob Webster, NASAA spokesman.

The association is aware that states at time take different positions on fees. However, that could also reflect different services provided by investment advisers in various states, he said.

In the case of a firm charging clients two different fees, states are generally resistant to this approach, Mr Webster said.

NASAA hasn’t had complaints from advisers about fee model approvals, but it’s open to exploring it further, he said.

About 96% of RIAs assess fees based on how much assets they’re managing, according to the InvestmentNews 2016 Financial Performance Study. The survey allowed selection of multiple pay models, and about 44% said they set prices based on flat or tiered-dollar fees, 28% have hourly fees and 26% have a per-project fee, the study found.

Increasingly, RIAs are moving to fee models not based on AUM in an effort to better reflect the planning and other financial help they provide instead of focusing only on investments they manage.

Retainer fees often allow advisers to work with younger clients and those without large amounts of assets.

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