Let’s talk about compensation. More specifically, let’s discuss how independent RIA-based financial planners get paid by their clients. Then we’ll look at ways these advisors can broaden in-house fee structures to serve more clients in need of their help — and perhaps do it more efficiently than ever before.

Fee Structure #1: Charging on Assets under Management (AUM)

Hands down the most popular payment model for RIA-based advisors is charging a fee on assets under management. That’s where RIAs charge a percentage of each client’s AUM, typically on a monthly or quarterly basis.

How much do advisors charge in this model? Typically, around 1% of AUM, but that may not include what the underlying fund managers charge, which are usually passed through to the consumer. With fees bundled, retail RIA clients were charged, on average, 1.17% in 2019, according to RIA in a Box, a compliance and cybersecurity provider to RIAs. The median all-in fee was 0.98%, however, indicating that about half of RIAs charge a bit less than than the “typical” 1%.

In the wider advisory world, including brokerage-based advisors and call-center complexes, all-in AUM fees can run as high as 3.50% and as low as 0.38%, according to a report by Personal Capital, an RIA in Redwood City, Calif. Of course the higher the fees, the greater the negative impact of inflation on returns, especially in periods of volatility.

And there are several permutations to the AUM-fee model among RIAs.

Variations on a Theme: Tiered and Other Approaches to AUM Fees

Some firms offer flat fees that are tiered across entire portfolios. So, if the total portfolio value is under, say, $2 million, the RIA might charge 1.5% of the client’s AUM.

A black portfolio

But for portfolios worth more, fees decline in increments until you get into “negotiable” territory where clients with investment portfolios worth more than $25 million get more say in how much they’re charged. This formulation is a nod to the deal-making might that comes with scale.

Other firms use tiers, but charge at different rates at different levels of portfolio size within the same relationship. In this structure, a client may be charged something like 1.75% on the first $250,000, 1.50% on the next $750,000, and on up through different tiers. In this model, an ultra high-net-worth client might pay 0.50% or less on invested amounts over $25 million. To some, this structure is more fair to clients because everyone pays the same amount at equal deposit levels.

Also under the broad rubric of fees on AUM are fees by asset class. This may mean charging a small nominal fee (or nothing) on cash reserves, and charging, for instance, 0.75% on fixed-income holdings, and 1.50% on stock positions. To some degree, this approach mimics the pricing modules available to institutional investors such as pension plans and university endowments.

Performance-Based Strategies for Raising or Lowering Fees

There are also performance wrinkles on the AUM approach. A firm called Pure Portfolios in Portland, Ore., charges its clients a percentage of their AUM. The wrinkle? The firm will reduce the next year’s fees if the present year’s (usually pretty modest) growth target isn’t reached. The aim there is to align the firm’s interest with the client’s — and, undoubtedly, to provide a point of distinction to help the firm stand out from competitors.

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