As investors seek more from their advisors outside of basic asset management advisors are changing their fees to meet the demand for extra services, according to management specialists.
Advisors have taken on the added tasks of wealth planning, estate planning, retirement planning, and others, all the while their fees and fee structures have remained the same, according to Matt Matrisian, chief channel officer at AssetMark.
“Either they discounted their fees over time, or they just undercharged for the services now that their clients are demanding more,” he said. “We see a diverse disparity in the fees that advisors are charging as well as the models they’re charging their fees for.”
AssetMark, which is based in Concord, Calif., has been working with its advisors to help them re-evaluate their fee structures to determine if the work advisors are providing for clients is commiserate to the fees the clients are paying. As firms grapple with improving their margins, the solution might not be as simple as increasing asset fees, Matrisian explained.
“In order to be the most deliberate about the value you’re delivering and if you want to increase your actual fees, we need to set up a structured service model for you,” he said. “We will deliver this core service model and then we educate them on how to be able to speak to that service model going forward and we package that service model with effectively the new fee structure.”
Advisors are heeding that advice and implementing fees for certain services. Brett Fallon, a certified financial fiduciary at Tempe, Ariz-based Momentum Financial Partners, said his firm began charging clients separately for those seeking a financial plan.
This fee is based on an hourly rate of $250 and includes 10 hours of plan work. The total cost winds up being $2,500, he said. It is usually a one-time cost unless the client experiences significant changes to their financial situation that requires a re-examination of the plan, according to Fallon.
Monolithe Wealth Planning Group, a financial advisor firm in Newport Beach, Calif., also began charging a separate fee for their wealth planning services about five years ago. The fee is at least $1,500 although it can increase depending upon the complexity of the client’s financial situation, said Jane An, wealth advisor and president of the firm. By charging a separate fee for wealth planning, clients understand its value more, she said.
“We stay away from providing any free wealth planning because when we charge it is definitely more valued by clients because they feel that they’re paying for something that’s of value to them,” she said.
The firm is also re-evaluating the fees it charges to its various tiers of clients, in particular those with less than $750,000 in investable assets. There are other factors that determine the tiers a client falls into, including if the client produces referrals and if they do wealth planning.
Monolithe is looking at clients in this group to determine if the fees it is charging makes sense compared to the work being performed for those clients, An said.
“If they’re in the lower tier, we may have to raise their asset management fees just to make sure that we’re growing in the right way and we’re able to continue to provide them with the best advice,” she said.
A push for fee changes at that lower asset level is becoming common throughout the industry, according to Scott Smith, director of advisor relationships at Cerulli Associates. Despite the limited amount of assets those clients bring to the firm compared to other clients, they seem to require the most attention from advisors.
“Advisors did a cost/benefit analysis and realized these clients are frequently the most curious or most heavily serviced,” he said.
For the most part, they are younger clients who are trying to figure out their financial plan and have a lot of questions, according to Smith.
The fee changes have been minor, moving from one to as much as 1.5 basis points. It has been necessary for firms to receive compensation that equates to the level of work they have been doing.
“Under an AUM model, that’s a real opportunity cost for them to be working with those clients when they might take twice as much bandwidth as a higher balance client or even equal amount generating half as much revenue,” Smith said.
An and Fallon said when making changes they have been upfront and honest with clients and explained the reason for the change and clients have been receptive to it.
“The client explanation has been simple and straight forward,” Fallon said. “Clients have indicated that they are appreciative of expanded capabilities and the wholistic approach that we provide.”
Advisors who are nervous about speaking to their clients about changing their fees need to have more faith in their relationship with them, Matrisian said. They also need to realize that the change in fees may not be as dramatic for the client as it will be for the firm, he explained.
“Advisors underestimate the loyalty that they have with their existing client base,” he said. “Typically, the amount of fee adjustment that an advisor is going to execute is evenly impactful from the overall business perspective, but it is not at all impactful to the individual client.”
However, firms may run into an investor who bristles at the thought of paying more fees and in those instances, the firm may have to re-evaluate the relationship with that client, Matrisian said.
“If the advisor pushes back or isn’t entirely comfortable with raising their fees, then that’s when we start to think if there are other things that we could be doing with this client relationship that will allow us to expand our margin on that individual client and still the service that client would value,” he said.