Moving to retainer fees isn't just a computational change; it's a cultural one.

Many years ago, my switch from fees based upon a percentage of assets under management to retainer fees had a dramatically positive effect on my practice. Overnight, I could predict my revenues with a high degree of certainty. I no longer had to compute a precise, quarter-end portfolio balance before invoicing clients. And the switch took my fee structure's unintended emphasis off investment management and placed it squarely on the entire advisory relationship.

As attractive as these benefits may be, retainer fees aren't a panacea for all the disadvantages of other fee structures. They bring their own set of challenges, a few of which are illustrated by questions like:

Exactly what services will be included under this new fee structure?

How is the fee computed?

How does one factor into the fee time spent with and/or value received by the client?

Must the retainer fee be "resold" each year or does it renew automatically?

Should every client be charged the same retainer, or should it vary by client?

How does one adjust the fee, either up or down, when necessary?

The answers to these and other questions aren't the same for all advisors charging retainer fees because this fee structure is used across the entire spectrum of independent RIAs-by large and small firms for large and small clients. Variations in its implementation are unavoidable.

Bob Keats, a principal in Keats, Connolly and Associates Inc. of Phoenix, uses retainer fees in his firm's family-office business model. Keats, Connolly has just 70 clients and brings in an average of more than $28,500 per client relationship. The firm also has 18 employees, giving it average revenue of more than $100,000 per employee. Because Keats' firm provides family-office services, clients are getting just about everything imaginable for this fee, including tax preparation, investment management and comprehensive planning plus-no doubt-a plethora of "concierge" services.

But lest you think the retainer fee structure is appropriate only for the high-net worth client, Bert Whitehead of Franklin, Mich. counsels all of the members of his Cambridge Advisors LLC to use it based upon his own experience prior to starting the advisor network in 1995. And Cambridge's motto is "An Alliance of Fee-Only Personal Financial Advisors Serving Middle America," which describes a client group that couldn't be more different from that of Keats'.

Yet Whitehead firmly believes retainer fees are the best way to charge his clientele, as well. "We never liked AUM, as it doesn't pay us for what we do, for where we add value. It's gratifying to see that the profession is adopting this approach, and I think it is much cleaner from a conflict-of-interest standpoint," says Whitehead.

What do Cambridge planners charge? Well, they don't charge $28,500 per client. After performing an initial plan at twice his retainer fee, Cambridge member Ted Roman of San Diego charges clients a $2,400 a year ongoing retainer. Cambridge member Elizabeth Barrett of Plantation, Fla., charges a $3,000 minimum retainer. And Kelly Adams, in Whitehead's Franklin, Mich.-based office, earns average per-client retainer revenues of $1,800 from her client base.

While Roman's retainer may be less than Keats', his service mix is not dissimilar. "I practice the Cambridge method of comprehensive financial planning and investment advice," says Roman, who prepares client tax returns, too. He also uses the skills he's acquired from Coach University (www.coachinc.com) to help clients "expand," as he puts it. And while his average retainer per client may not be that of Keats, Connolly, his revenue per employee is right up there. With a gross of approximately $220,000, very modest overhead, and a total of two employees (Roman and his wife), Roman's per-employee revenue also tops $100,000.

What's the difference between the firms of Keats, Connolly and Roman Financial Advisors? Primarily size and lifestyle but, of course, there must be some differences in the services clients receive for these vastly different fees. The higher the fee, the greater the access a client typically has to his advisor. Roman's service is fairly structured. He has four face-to-face meetings per year (although some are actually done by phone, as is common in the coaching arena) and performs certain specific tasks for each client. All clients pay the same $2,400 retainer and, says Roman, "This wouldn't change unless I changed it for all clients."

What happens if the client gets an inheritance that significantly increases the portfolio the advisor is managing as part of the comprehensive service covered by his retainer? In many cases advisors don't increase their retainer fee, since this fee structure is meant to take the focus off specific services or events and put it on comprehensive financial planning. The time the advisor is devoting to that client, or the value that client is receiving, must noticeably ramp up before a fee change is in order.

Bedda Emous of Fiduciary Solutions LLC in Andover, Mass., charges by retainer but tracks all of her time. "Because of time tracking, I know that regardless of the asset size, accounts up to about $500,000 take about the same amount of work and time," she says.

Ben Utley of Utley Financial Planning Inc. in Eugene, Ore., says that "what comes or goes from the portfolio has no bearing on how I set the fee. I have calculated the time it takes [to serve a client] and I use the FPA Compensation and Staffing Study to make sure my fees are in line with 'virtuoso solo' firms [a designation in the Study for the 25% most profitable solo firm respondents]. Because my core competency is working with physicians, I know what issues they are facing and I have a good idea of the amount of work involved. I also have a solution to many of their problems even before they become clients, since I've already solved the problem for others."

Advisors who haven't yet tried a retainer fee structure often assume the fee must be "re-sold" each year, but that's not the case unless an advisor finally decides an increase in the client's fee is in order. Convincing a client that he's receiving enough added value to justify a fee increase isn't difficult if that value is being continuously demonstrated during the relationship. Utley uses his mid-year client review meeting as an opportunity to bring out the proprietary checklist he calls his "Points of Review" form. On this form, which he reviews with his client, the client can see the progress they've made together towards objectives such as "reducing/controlling risk" or "making efficient use of capital," as well as planning areas that might need continued work.

Linda Leitz of Pinnacle Financial Concepts Inc. in Colorado Springs, Colo., demonstrates value a bit differently. Also a Cambridge member, Leitz performs the usual array of Cambridge services, including investment analysis, recommendations, implementation and monitoring, budgeting and spending analysis, goal setting, retirement planning, education funding planning, insurance analysis, tax preparation and tax and estate planning. Says Leitz, "We show the client the difference between our fee and the approximate cost of all these services on an unbundled basis." The difference is great enough so that Leitz' clients have no doubt they're receiving good value.

Emous takes a time-based approach to demonstrating value. "Each quarter, clients receive an itemized time and charges statement which shows what we did for them and the time it took. They see that the retainer they are paying is always less than my hourly rate of $175, so they believe they are receiving incredible value. I am very consistent about tracking time in Timeslips (http://www.timeslips.com/) to capture many of the thankless tasks that we all do. The time accounting not only shows the clients value, it educates them as to how much work it would be if they were doing it," says Emous.

Keats, Connolly stays in close contact with its clients throughout the year but, just to be safe, schedules a major planning activity with each client each quarter. Additionally, says Keats, "We update their plans in a regularly scheduled module system. Annually, we summarize via letter to the client what we did in relation to the client's goals and what we have scheduled for the upcoming year. We will even show them the man-hours we expended over the past four quarters." Keats also reminds clients what they would be paying if they tried to duplicate everything Keats, Connolly does for them using "a la carte" services obtained elsewhere.

Through all of this demonstrating of value, our advisors don't tend to dwell too much on investment performance. Says Utley, "Investments are only 5 to 10% of what I talk about with clients. At an earlier stage in my practice, when I put more effort into managing investments instead of financial planning, I didn't feel I was delivering. Now, I've got one client who made no investments during the last two years; he was happy just to pay down his mortgage." Utley sees himself as a financial advisor who works with clients and their assets, but not an "asset-gatherer."

In fact, the nature of the retainer fee makes it possible to work with clients who might have little in the way of investment assets but financial complexity that nevertheless justifies the fee.

Barrett talks about the client she worked with whose primary balance sheet item was her $80,000 in credit card debt. "She said, 'I can either put $5,000 towards improving my financial future, or I can buy more shoes.' She's made great progress and will be out of debt next March," says Barrett, adding, "This client is someone an advisor with an 'AUM minimum' would never meet with, but I want to work with any client who's willing to improve her financial situation, and willing to pay a fair fee to do so."

It should be apparent by now that retainer fees aren't just a different way of charging; they're indicative of a new culture of advice. Retainer fees mean you advise on the whole client (not just his investment assets); you regularly demonstrate a wide range of value (rather than hoping for positive investment performance); and you focus on goals (of which investments are just a means to an end). Could you do this using other fee structures? Perhaps, but retainer fees and the methods they imply lend themselves particularly well to client contact and follow-through. Utley may sum it up best when he says, "With the retainer fee approach, there is every opportunity for the client to get the work done and for the plan to succeed."

David J. Drucker, MBA, CFP ([email protected]), a fee-only financial advisor since 1981, is editor of the Virtual Office News monthly newsletter, and co-author of the book Virtual Office Tools for a High-Margin Practice (Bloomberg Press, 2002.)