Unique and Different Fee Structures Financial Advisors Can Embrace for Their Practice

Fees: The lifeline of your business. What pay your bills. What keep your team employed. The rewards for your advice and expertise in managing wealth.

But the traditional fee-based or fee-only pricing model, which is comprised of charging a percentage on assets that you are advising or managing, may seem antiquated to you, or be holding you back from growing or retaining some assets.

How do you know you’re ready to consider changing your fee model?

For starters, it’s becoming harder and harder to answer some of these frequent questions from prospects or upset clients:

1. Why would you still charge me a fee when my assets are going down?

2. Will you still charge me 1% if I’m going to sit in cash for a year or two?

3. What if I am very happy with my existing money manager, but I want to pay you for your financial planning expertise?

4. What if I just have a few important financial questions per year that I want to pay for, and don’t need you on a permanent basis?

5. I know your 1% COMES with financial planning, but what if I don’t need any planning expertise and just want you to manage my money?

6. I know I need planning in the first 2-3 years, but then what? Do I still keep paying the all-inclusive fee when I don’t need the planning part?

All of these question marks highlight some of the inadequacies that come with the fee-based model.

In business school, they talk to us about the importance of the 4 P’s of Marketing:

Product

Place

Price

Promotion

As a financial advisor, if you are looking to market yourself and be relevant to new prospects, it’s critical to have a “pricing” model that stands behind a promise.

In this article, we wanted to share with you 10 different pricing structures that may be better suited for the types of clients and opportunities you’d like to go after.

Let’s take a look at 10 alternative fee structures that can be used by Wealth Management Firms: 

1) Assets Under Management (AUM)

The AUM-based fees structure is likely the most common, setting up fees based on the amount of assets managed per client – typically with financial planning services included. 

2) Hourly 

For clients that don’t have enough to invest to warrant a management agreement on their assets, an hourly fee typically makes sense as a way to charge for advice and guidance from an RIA.

I’ve seen situations when a prospect is quite happy with their existing money manager but wants to “pick the brain” of the financial planner. If there is capacity and time on your team, why not generate revenue out of it by providing hourly advice to your prospects? It may end up leading to a new AUM client down the road.

For this style, we would suggest collecting a retainer in advance to serve as a bank to draw hours from.

3) Tiered 

In this fee structure, an investment advisory firm charges different amounts per level of assets under their care. For example, the fee structure may be set up to charge a certain percentage on the first one to five million dollars in assets, and then a different percentage on all assets above that amount. 

4) Complexity-based 

In this alternative fee structure, clients are charged based on the complexity of their assets and personal situations. For example, a single person would be charged less than a client who is married and has children to account for. 

5) Life-stage

Clients are charged based on their stage in life. For example, clients who are early in their careers may be charged at a lower rate, while peak-career clients with more meaningful assets to manage may be charged more. This is a good structure to attract younger investors who may not yet have a lot of money to invest, but could still benefit from advice and guidance of an RIA. 

6) Subscription-based

In this fee structure, clients are charged based on a very specific scope of work and the client is billed a flat monthly fee for that support. Typically, services provided are focused on financial planning. You’ll often see this fee structure combined with an AUM fee structure. 

We’re all used to subscriptions these days. From Spotify to gym memberships. Why shouldn’t we offer this same style of flexibility to prospects and clients who want to have the monthly freedom to get advice from you?

Here’s an example of how this can work:

Provide prospects and clients a Silver, Gold and Bronze package.

The Silver gets 2 hours of your time and one “chapter” of a financial plan monthly. Say, for example, month one includes Insurance Review. Month two involves College Planning. And so forth.

Gold and Bronze get more hours and more financial planning “chapters” to review on a monthly basis.

How will the client decide which subscription package is right for them? Create your own financial planning discovery questionnaire where they can self-assess their needs.

Contact us to help you create the right questions!

7) Asset class

Clients are charged different amounts based on different classes of their assets under care. For example, equities may be charged at one rate while bonds are charged at a different rate. This structure tends to reflect the complexity of managing different kinds of assets. 

8) Year-one pricing 

Clients are charged more in the first year of their relationship with the RIA and then charged less in the following years. The idea here is that the first year of the relationship will require more work from the RIA to establish management of assets and baseline financial planning. 

9) Expenses

There’s a lot that goes into being a fiduciary for clients, including research, regulatory and compliance expertise, and documentation requirements for the SEC. All of that additional work often comes at the cost of additional headcount or entire departments at larger RIA firms. This fee structure reflects those costs. 

10) Split financial planning and asset management fees

This structure bills clients separately for financial planning and management fees instead of rolling them into one fee structure. The benefit of this structure is that it allows more transparency into fees being charged to the client and also the client has a clearer understanding of the value provided by each of these distinct services. 

So what’s the best fee structure for your firm? One of the key questions you can ask yourself is: What do we want to be known for? Your fee structure can look significantly different if you want to be known for your money management expertise versus being a one-stop shop for a client’s entire financial picture. Your pricing can actually emphasize your brand [read our article on branding for financial advisors in Kitces.com]

It’s also important to have a hard look internally and determine if you have the capacity within your team to take on some unique fee structures. If you have excess capacity with some teammates, you may be able to provide hourly or subscription-based pricing, for example. If everyone is running around extremely tapped [read our article on advisory firm bandwidth issues in RIABiz], you may need to consider some more annuitized fee models.

The correct answer may be a combination of the above, or possibly a structure not listed here.

Select Advisors Institute can help you determine the best fee structure that can help maintain long-standing relationships, all while being disruptive and modern for new opportunities looking for unique fee structures.

Contact us to help you make such important decisions around your business.