Rethinking advisory fees means figuring out value

Financial advisers should be rethinking the fees they charge clients if they are just billing 1% on assets under management simply because it’s considered an industry norm, according to an InvestmentNews RIA Summit panel of experts on Wednesday.  They need to be matching the value they provide clients with their cost.

Most financial advisers still charge just an AUM-based fee. Some advisers, though, are now experimenting with alternative fee models where an additional flat fee per quarter, or a monthly subscription fee, or an hourly fee is added to an AUM-based fee, said Bob Veres, Inside Information commentator.

“I think if I survey advisers in 10 years, it will be mostly something other than AUM-based fees, but I don’t know what it will be based on,” Veres said.

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Rick Ferri, founder and CEO of Ferri Investment Solutions, said “the 1% fee is a legacy” and is likely too high unless a client has about $250,000 or less.

“We are all supposed to be fiduciaries,” Ferri said. “If you are charging someone $10,000 a year for something they could be paying $5,000 a year for, are you really being a fiduciary? You are supposed to be looking at all fees, including your own.”

Sheryl Garrett, founder of Garrett Planning Network, a group of advisers who charge clients by the hour, said she advocates charging based on six-minute increments.

“If you are starting to think about a new fee structure, I recommend charging for your time,” Garrett said, noting that's how most every other consulting-based professional does it.

Financial advisers should figure out their value propositions and be able to explain to clients what they are providing, said Richard Chen, managing partner, Richard L. Chen law firm.

“It’s a whole lot these days, more than it used to be when it was an asset-based fee that was for active investment, now it’s much more financial planning,” Chen said.

Veres agrees.

“The value proposition of the profession has evolved from I’m going to find you the very best actively managed mutual funds in the market, to I’m going to give you really great advice on how to make your life more efficient financially," he said.  

Veres recommends advisers start bifurcating their fee structures so that some fees cover the financial planning work done and some of it asset management. “Gradually move from an AUM to a flat fee retainer model, which is what I think the marketplace is mostly going to accept and embrace.”