Could asset-based fees be a thing of the past?

Just maybe, according to a lively panel discussion late Wednesday at the spring meeting of the National Association of Personal Financial Advisors (Napfa) in San Diego.

Moderated by Bob Veres, publisher of the Inside Information website and a critic of AUM pricing, the pointed questioning of the AUM standard by the panel of hourly and retention-fee advisors was not a Napfa idea, but came from his own desire to stir things up.

“Financial planning is the free toaster” of the industry, said Veres, comparing it to banks that years ago would offer toasters for new accounts.

Likewise, advisors usually include planning within the fee charged for asset management.

“It makes no sense to throw in your core competency [for free] for something you can get a lot cheaper” somewhere else, said Roy Diliberto, founder and senior partner at RTD Financial Advisors, referring to the practice of charging for commoditized asset management while giving away the planning. 

RTD uses a retention-fee model, which mitigates conflicts, Diliberto said. By way of example, suppose a client asked about investing $500,000 in a business venture. But before saying yes, an advisor couldn’t help but think about the revenue to be lost with that recommendation.

A similar conflict exists in recommending clients pay down a mortgage, said Carolyn McClanahan, founder of Life Planning Partners. She sometimes gives that advice in order to maximize home equity, which is protected from creditors under Florida law.

The perception among the public is that hourly fees are “the purest form of financial planning,” said Mark Berg, founding principal of Timothy Financial Counsel. “We don’t do any marketing—we’re answering the phone.”

“If fees are based on assets under management, that’s where the client’s attention goes,” added Jacob Kuebler, partner at Bluestem Financial Advisors.

His clients never ask to see performance reports, and instead focus on meeting their goals.

Kuebler’s firm handles many clients whose assets are tied up in state pension plans, or young professionals without large savings, so charging on assets doesn’t work, he said.

Despite some advantages, though, hourly or retainer models may be more complicated than AUM pricing. 

RTD charges $10,000 per year for clients with $1 million or less, and another $1,000 per year for additional net-worth breakpoints.

Client fees are fixed for three years, “so if you hit the lottery, or take out money, the fee doesn’t change” right away, Diliberto said.  Fees levels are reset every three years. 

Life Planning Partners charges clients $5,000 “to walk in the door,” McClanahan said, with incremental charges added as a client’s complexity increases, plus a basis-point fee depending on the number of different investment accounts. Fees are fixed for two years.

Timothy Financial Counsel charges by the hour. Clients are given estimates for the initial plan. Rates depend on complexity of the case and the experience of the advisor doing the work, from $240 an hour to over $300.

Bluestem Financial Advisors uses a retainer model based on a measure of total net worth. Again, fees are adjusted based on complexity, so a client with, say, rental properties pays more, while clients with pension income that doesn’t require analysis pay less.

The key to making a transition away from an AUM model is to make sure you have the right clients for it, McClanahan said. She wants delegators who value comprehensive planning and are will to pay for it.

Diliberto gave AUM clients the option of sticking with that arrangement when he converted, so his firm lost few clients from the change.