With so much disruption in the markets and the financial industry, reexamining the way you approach your fee structure may not be high on your list of priorities these days. But new approaches to fees are starting to gain traction, especially among newer advisors and next-generation clients.

Instead of being an unwelcome complication, revamping your fee structure could be a relatively simple way to broaden your client base.

The False Dichotomy
E*TRADE Advisor Services recently sponsored Bob Veres’ 2020 Inside Information Fee Report, which found that about 76% of advisors with 20 or more years of experience primarily use an AUM fee structure, compared to just 53% of those with less than five years under their belts (Source: Bob Veres, "2020 Inside Information Fee Report." Survey conducted from May to June, 2020, among a convenience sample of 1,037 advisors).

The fact that more-experienced advisors prefer AUM doesn’t necessarily mean that AUM is always better, just as the openness of younger advisors to other fee models doesn’t necessarily mean that more-established firms are missing the boat. As always, the best fee structure for your business will depend on your firm’s goals and how to best serve your clients.

That’s where things get interesting: The apparent dichotomy between more- and less-experienced advisors may have something to teach us. For example, more-experienced advisors might prefer AUM because they typically work with older, wealthier clients who are more familiar with an AUM fee structure, and can benefit the most from it. On the other hand, newer firms may be working with younger or less-wealthy clients who have fewer assets to manage—and are often more receptive to paying for services a la carte, by the hour, or on retainer.

And while there isn’t a mass exodus from the AUM model, it seems that more advisors are willing to work with relatively small clients: Only 9% of fee-only advisors said they would turn away a client with a portfolio of just $250,000, and only 3% would turn away a client with a $500,000 portfolio.

If you’re among the many advisors who don’t shy away from portfolios of all shapes and sizes, you may have already found that an AUM structure may not necessarily be the best fit for everyone—and might even price out mass affluent, next generation, or high earner not yet rich (HENRY) clients. The larger the portfolio, the more sense an AUM fee structure makes for everyone, and vice versa.

In other words, it may be the clients (and not the advisors) who are shaping fee structure, and part of attracting new clients may include finding ways to offer fee options that work best for them. The good news is that your fee structure doesn’t have to be an either-or proposition.

The Best Of Both Worlds
Advisors can’t be all things to all people, which is why the rule of thumb to focus only on your “ideal clients” can be an effective way to maximize your resources. At the same time, developing an alternative fee structure—such as an hourly rate, subscription, flat fee, or a hybrid model—can help create fresh opportunities without cutting into your success with your current clients.

Introducing alternative fee options within an existing AUM framework may allow you to serve your current High Net Worth (HNW) and established clients, while also creating the flexibility to accommodate smaller portfolios. In fact, data shows many firms are already finding this concept attractive.

Almost half of all advisors (44%) surveyed in the Inside Information report have developed an alternative fee structure for less-wealthy clients, while 36% plan to switch from AUM to a more flexible combination sometime in the next two to five years. Of the advisors who offer flexible fees, about 33% charge AUM for some clients and flat monthly or quarterly fees for others, while 13% supplement AUM with hourly fees, and 6% offer subscriptions.

Of course, there’s no hard-and-fast rule on how to determine which fee structure makes the most sense for your client base, just as there’s no single way to determine how to run your business. That’s the beauty of independence: You have freedom to create something that works for you and your clients, whoever they may be.

Not An Either-Or Proposition
Overall, the AUM fee structure remains the unofficial industry standard, with nearly 73% of advisors saying they rely on it exclusively. You may be among them—and that may be the best choice for your business. But it may be worth exploring whether an alternative fee structure presents an opportunity to connect with a more diverse client base. A hybrid or flexible fee structure may not be a good fit for every practice, but in the right situations, it may offer both clients and advisors more freedom to grow.

Gabriel Garcia is managing director of advisor client experience at E*TRADE Advisor Services.