Should you Consider Innovative Fee Structures
Complexity-Based Retainer Fees is on the Rise
Financial advisory is almost always undergoing significant transformation, and Fees can often be a contentious issue, particularly when there are waves of new innovations that offer some form of competition, or cause clients to rethink the value proposition.
Some resourceful advisors use these moments as opportunities to differentiate, recently there’s been a number of such advisors that are redefining their traditional fee structures to better align with the value they provide to their clients.
One such pioneering approach is the adoption of complexity-based retainer fees for financial planning services, a departure from the conventional assets under management (AUM) fee model. This, perceived to be an innovative fee structure, might just be the paradigm shift, that emphasizes the intricacy of financial planning over the sheer size of assets managed.
This approach certainly ruffle some feathers, but it might be a useful exercise to consider in some circumstances. My sense is that in the long haul, we all need to be cognizant of these nuanced approaches and get an understanding of why there’s an emergence of complexity-based retainer fees or other similar alternatives, whether they offer any benefits, and how they might be reshaping thinking in the financial advisory industry.
Understanding Complexity-Based Retainer Fees
Complexity-based retainer fees seems better aligned to reflect the depth and breadth of the financial planning services provided to clients, at least for value conscious investors and the younger professional audiences.
Unlike the common AUM model, where fees are calculated as a percentage of the total assets managed, complexity-based fees focus on the multifaceted nature of a client's financial situation.
The reality is that there’s no single standardized formula here, it come down to how an Advisor values the various components of their service offering.
Advisors assess various factors, such as family size, multi-generational planning, trust structures, business planning, and overall financial organization, to determine the complexity of a client's needs. The fee is then calculated based on the anticipated workload and level of expertise required to address these complexities.
Complexity-Based Retainer Fees have some Advantages
Fairness and Transparency: Complexity-based retainer fees are transparent and fair. Clients understand that the fee is directly related to the intricacy of their financial situation and the services they receive. This transparency builds trust between clients and advisors.
Value-Oriented Approach: By focusing on the complexity of financial planning needs, advisors can deliver highly personalized and comprehensive services. Clients appreciate the value they receive, knowing that their unique circumstances are taken into account in the planning process.
Client-Centric Focus: Complexity-based retainer fees shift the focus from asset management to holistic financial planning. Advisors can dedicate more time to understanding their clients' goals, aspirations, and challenges, leading to more customized and effective solutions.
Stability in Revenue: Unlike AUM fees, which fluctuate with market performance, retainer fees provide a stable source of revenue for advisory firms. This stability allows advisors to plan their resources and invest in delivering high-quality services.
Can Complexity-Based Reshape the Financial Advisory Industry?
The adoption of complexity-based retainer fees has the potential to really alter how service is delivered in the financial advisory industry, and is likely a step towards new and very different compensation models in time to come.
Advisors that are considering the implementation of complexity-based retainer models tend to be independent, and therefore this feels like they are using this approach as another interesting tact be competitive, and their would argue that this approach adds value to their relationships in several ways:
Diverse Client Base: Complexity-based fees enable advisors to serve a diverse range of clients, including those with complex financial situations but relatively modest assets. This inclusivity allows advisors to extend their services to a broader demographic.
Professional Recognition: Advisors employing complexity-based retainer fees are recognized as professionals who value the depth of financial planning. Clients view them as experts who provide comprehensive solutions tailored to individual needs.
Industry Standards: As more advisors embrace this innovative fee structure, it is gradually becoming an industry standard, challenging the dominance of AUM fees. This shift encourages healthy competition and innovation within the financial advisory sector.
So What’s the Alternative!
A potentially better approach might be to refine your existing fee models to make them more transparent and better aligned. Or alternatively start giving your client more attention, they will likely be open to paying more if they feel like they get a quality personalized service.
Alternative to complexity-based retainers for financial advisors is a fee structure that aligns more directly with client needs and fosters transparency, but this has always been the solution anyway!
Here are a few avenues that might be considered more effective and equitable:
Flat Fee Retainers: Charging a flat fee for services rendered can simplify the billing process and make it easier for clients to understand what they are paying for. This structure works well for clients who need ongoing advice throughout the year and prefer predictable costs. Somewhat like the Netflix, pay a flat fee and use as little or as much as required.
Hourly Rates: Billing based on the actual time spent working on a client's financial matters can be a straightforward and transparent method. This structure is often preferred by clients who need occasional advice rather than ongoing management. This is really hard to scale, you only have so much hours in your days and to make it worthwhile you would have to charge a substantial premium that few would be willing to pay. That said, for certain clients, this is a reasonable approach.
Fee-Only Planning: This involves charging a fee based directly on the financial planning services provided rather than on the complexity of the client’s needs or the products sold. This model promotes transparency and reduces conflicts of interest, as the advisor's compensation is not tied to the purchase of particular financial products. This approach works well, if you are not involved in the day to day administration of the client’s funds and are simply being consulted for planning purposes.
Asset Under Management (AUM) Fees: Although also subject to debate, charging based on a percentage of the assets managed can align the interests of the advisor with those of the client. The advisor earns more only if the client’s assets grow, which can motivate the advisor to focus on growing the client's portfolio. However, this model might not be suitable for clients with smaller asset bases or those who need advice that doesn't directly involve asset management.
Performance-Based Fees: Tying fees to the performance of the client’s investments can be highly motivating for advisors to achieve better returns. However, this can also encourage riskier investment strategies and is generally regulated to ensure it's offered only to more sophisticated clients.
Tiered Fee Structures: Combining elements of these methods, advisors might offer tiered services with clearly delineated service packages at different price points. This helps clients choose the level of service they need and understand exactly what they are paying for at each level.
Each of these alternatives has its own set of advantages and drawbacks, and the best choice often depends on the specific needs of the clients and the nature of the advisory services offered. Transparency, simplicity, and alignment of interests remain key factors in determining the most appropriate fee structure.
Conclusion
Financial advisory services is an ever evolving space, the adoption of complexity-based retainer fees represents a progressive and client-centric approach, however it may be a place to transition to over time, tweaking your existing approached based on individual preferences and relationships might serve your better.
By focusing on the intricacies of financial planning needs, advisors can deliver unparalleled value to their clients while fostering transparency, trust, and stability. As this innovative fee structure gains prominence, it could reshape the industry, redefine the standards of service, and empower advisors to provide holistic, personalized financial guidance in a different manner.
In the years to come, the prevalence of complexity-based retainer fees is likely to grow, reflecting a fundamental shift in how financial advisory services are valued and compensated. This is a transition that will likely take time to become the norm, but don’t forget, that in the AUM fee based service replaced commission only service in just the last twenty years, this is just the next iteration of how advisors earn fees.