A Huge Opportunity

March 2, 2012 • Page 5 of 5

Anybody paying more than that as a percentage of assets and basically getting just asset management and a few other services is the perfect candidate to hear the message of how much more value they could be getting from you for the same or lower fee. You were looking for a way to get higher net worth clients in this economy? Now you have it, but this window of opportunity may not be open for long.

For 23 years, Bill and his team have been helping advisors attain top 1% success as measured by value delivered to the client, financial success and quality of life. To learn more go to www.billbachrach.com or call 800-347-3707 to schedule a Success Road Map® consultation.

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6 Comments

Comments

laxadvisor 12 years ago

Really what clients want?

I don't agree with the premise of the article that there is a huge opportunity. Consider many advisors who practice in this model already; why is the opportunity now? Why have these firms that have been in existance for 20 years not won already? Why, frankly, are they small, owner dependent, and un-scalable and un-saleable? There is value in managing assets as a distinct service to clients. They want to know their assets are being cared for. Just because it's 'fairer' to charge the same during a downturn, do you believe a client sees it as easier or harder to stay with the plan of writing that $20,000 check? Flat-fee advice also incentivizes the advisor to do less, placing less importance on what a service the client needs on a regular basis. When you move from asset management flat fee, the relationship changes from having asset management be an important piece to success, reviewed regularly, to confusion whether or not it's important, and whether or not the advisor even is in tune with the asset management plan. Turnover is often high in that model, and when clients leave it they go to brokers for assistance, scraping the entire plan that was in place. I prefer the flat rate for planning based on an hourly estimate, along with an AUM choice that clearly lets the client know that you are an asset manager as well as an advisor and are paint separately for two distinct services. Yes, you can pay a flat rate for reviews and recommendations. But, that is not the ongoing asset management service most clients want.
Kent Grealish 12 years ago

Excellent points - particularly that people are ethical/unethical not compensation methods. Flat fee has advantages over an hourly rate but you can set the fee based on a firm estimate of how long the project will take. An hourly rate better matches the actual work performed to the amount of the fee than anything other than a minutely detailed item-by-item value-based fee. I don't condemn AUM, it is a legitimate way to price your services, but it is one-size-fits-all for the most part and doesn't always correlate well to the value received. As Ray Dilberto asks: why do you deserve a raise just because the market went up [that's beta not alpha] and why should you take a pay cut simply because the market declined? Also, under AUM, inevitably some clients are overcharged simply because they are worth more - does a portfolio worth 2x actually take twice as much work as one worth 1x?
[email protected] 12 years ago

Totally Agree

I work strictly on a flat fee basis for my comprehensive service, including investment management. I feel this better reflects the value I provide, which is my advice in areas where we have a high degree of control. Charging a fee based on AUM is a broken model. The markets will do what they will and the advisor adds no value to this. The flip side is that the advisor should not be penalized for market behavior. Positioning yourself as a trusted comprehensive advisor focused on providing value to the client as opposed to just gathering assets is a much more sustainable model and better aligns with the client's interest.
12 years ago

Disagree, too simplistic

Bill I have a great respect for you, but I strongly disagree with the idea that fees might go to a flat dollar amount. It's just contrary to human nature.Picture a normal economic cycle where a Client sees a temporary decline in account value. With a percentage based fee, the advisor 'feels the pain' along with the Client. Clients (at least my Clients) are well aware of this. During the 2008 downturn, my Clients were well aware that my income substantially shrank and we could commiserate together. If I was getting a flat dollar amount despite the decline in their account, I know it would have alienated those folks. A Client would have to be incredibly divorced from the performance of their account to not be affected by that dynamic.Picture now a year of nice positive returns. The Client is happy bc their account has increased, and I get a raise due to the larger account value. That is a motivating factor to me (the raise) and my Clients know that. I think my Clients appreciate the import of that motivation. Lastly, consider the alternative to have to go back to a Client from time to time and increase my flat dollar fee. No matter how good the Client relationship, that is opportunity for discord. Why even mess with that??
tull1555 12 years ago

Elimination of Conflicts of Interest?

There is no such thing as the elimination of conflicts of interest...they only change with different models. I have seen several Fee-Only advisers erroneously state in their advertising they have No Conflicts of Interest or their model has eliminated them.You failed to mention that the percentage of assets under management model has one over on the flat fee model, as the client makes more money, so does the adviser, and vise versa.I have been charging a flat quarterly fee for nine years for my base clients and agree it is a better model. I also charge hourly for other clients. When I charge hourly, I have an incentive or conflict to go a long time. When I charge a flat fee, my conflict is to get it done as fast, cheap, and efficient as possible. The list of conflicts exists, is lengthy (I only idenified a couple of conflicts), and is material to every professional engagement.
[email protected] 12 years ago

Definition of Fee Only

I take exception to the author's definition of "fee-only" which is described in this article as "...an hourly rate or a flat dollar amount, usually an annual number that is paid monthly or quarterly and deducted automatically from a bank or money market account."Fee-only isn't defined by how the fee is calculated, or which account is charged, but rather who pays the fee. If an advisor's compensation is derived only from the client payments then the advisor is fee-only.NAPFA, a group made up solely of fee-only advisors, define's fee-only this way - "Fee-Only simply means that all of an advisor's compensation is receivedfrom the client, and none from product sales commissions. This is typicallyachieved through a combination of hourly fees, financial planning fees, and asset management fees."Fee-based is compensation from both client fees and commissions, primarily client fees.If an advisor received all comp from AUM fees they are fee-only, not fee based.

A Huge Opportunity

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