As the financial planning industry moves inexorably to more of a fee-for-service model and away from the traditional assets under management (AUM) standard, advisors need to be aware of certain differences in how they bill their clients to avoid regulatory compliance problems.

While many advisors embrace the new paradigm—believing it will help them attract clients they haven’t been able to reach before, especially those that don’t bring with them a sizable investment portfolio—accepting payments on a pay-as-you-go basis may create problems if not done properly. Lots of professionals—doctors, dentists, lawyers, accountants—commonly accept credit cards for payment, but none of them have the same strict compliance standards for being paid as financial advisors do.

Under the traditional AUM model, advisors are compensated on a percentage of the client’s assets, but the act of taking money out of the client’s account to pay the advisor is handled by a third party, the custodian. In the fee-for-service world, however, the advisor is paid directly by the client, often on a recurring basis, which could trigger a custody issue if not done properly.

One company that is trying to simplify that process—to make it easier for financial planners to get paid while remaining compliant—is AdvicePay.

Based in Bozeman, Mont., AdvicePay was co-founded in 2016 by CEO Alan Moore and Michael Kitces, the nationally recognized thought leader in the financial planning industry. It was born out of a gap they spotted in the industry, namely the “need for a streamlined, compliant, secure way for advisors to get paid for their advice,” as it says on their website.

“Financial advisors have really struggled because they have different regulations, primarily the custody rules,” says Moore, himself a financial planner. “The custody regulation says that if an advisor has too much access to the client’s banking information, to the point that they could take money out of the client’s account without their permission, they are deemed to have custody. Advisors want to avoid custody at all costs.

“The credit card system your doctor uses doesn’t necessarily mean a regulator is OK with a financial advisor using it,” he says. “Financial advisors cannot retain credit card or ACH (automated clearinghouse) information. Most payment systems, once a client makes a payment, store the information, and even if you can’t see it you can bill them again. Fitness centers and the like do it all the time. They don’t need the customer’s permission to do that. But financial advisors can’t do that.”

“The custody rule is there to protect the client from the advisor misappropriating or taking client funds without authorization,” explains Kelli Haugh, a Delray Beach, Fla.-based vice president at Foreside, a compliance firm. “Some regulators believe having access to that [payment] information and being able to debit those fees gives the firm access to the client’s funds or securities.”

That’s why Moore and Kitces decided to build a payments system for financial advisors and planners that doesn’t trigger custody.

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