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.

“Credit card acceptance is not the problem. The problem is the functionality of the system that you’re using to bill on credit cards,” Moore says. “If that system has too much functionality or improper work flows that were not built for financial advisors, most likely it will trigger custody and compliance concerns.”

Advisors should be able to avoid custody issues if they don’t have access to the clients’ account information by having the clients enter their own information into the payments platform, Haugh says. Some individual state regulators are particularly conservative when it comes to fee debiting.

“We don’t give any power to the advisor; all the power is in the hands of the client,” says Moore. “The client sets up the payment; they can cancel the payment if needed. The client has to approve it if you edit the amount of the payment. In most other payment systems, that is in the hands of the business.”

Right now, AdvicePay seems to have the field to itself, although many financial planners use general purpose electronic processors like Square, PayPal and QuickBooks. But financial planners use those platforms at their peril because they violate those systems’ acceptable use policies, AdvicePay says.

AdvicePay was started in March 2016 and launched its first product in January 2018. In January of this year it launched an enterprise version to accommodate large broker-dealers and RIA firms with multiple advisors.

It quickly scored a coup when Cetera announced that it would offer its nearly 8,000 financial advisors AdvicePay’s technology platform for client payment processing.

“I think the Cetera announcement surprised some people that big firms were doing fee-for-service planning work,” Moore says. “I think the success we have seen with AdvicePay already is a leading indicator of where the industry is going, which is advice-centric. And it is going there a lot faster than people realize. But you’re not going to offer the service if you can’t get paid, and we facilitate that.”

Custody avoidance isn’t the only thing AdvicePay offers.

Its e-signature feature allows client payment agreements to be signed within AdvicePay, ensuring that the handling of all documentation, billing amounts and payment information avoids making the advisor a custodian.

“Legally, you have to have a financial planning agreement to get signed as part of every engagement, Moore says. Using AdvicePay, financial advisors can get their agreements signed electronically. “It’s a simple single work flow,” he says.

AdvicePay also automates invoicing and recurring payments. “If you are working with 50 to 100 clients on an ongoing basis, you need something that is more efficient and automated,” Moore says. “Our system allows clients to set up subscription payments, whether it’s monthly or quarterly, so that they pay the advisor automatically. They don’t have to write a check or payment invoice; it just happens automatically, which is a lot more convenient for the advisor and the client instead of it being a manual process.”

“If the platform facilitates fee invoices, that’s a plus,” says Haugh, the compliance expert. “Many—but not all—state regulators require that invoices be sent concurrently with the fee debiting, showing the methodology of how the fee is calculated, when the fee is debited, etc. So if you have a platform that can facilitate that, it would be helpful to the advisor.”

“The pain for me is that I just don’t like billing my clients,” says Joe Matelich, a financial advisor at Physician Advising LLC in Grand Junction, Colo., and an early adopter of AdvicePay. “I would rather spend my time doing financial planning and investment management than making sure the money shows up in my checking account each month.”

“When you are billing your client, the less they have to worry about it, the better off you are,” adds Yves-Marc Courtines, principal at Boundless Advice LLC in Manhattan Beach, Calif. “I want clients to know they are paying a fee for the service I provide, but they don’t necessarily need to know the mechanics of it.”

In addition to being an AdvicePay user since its launch, Courtines is also an investor in the company and sits on its board, along with Moore and Kitces. “Having an effective payments processor that understands our business is tremendous,” he says. “Half of my clients I would not have been able to take on if I could only do AUM billing. Now I’m accessing new clients, without the pressure to build assets under management.”

Of course, financial planners can still accept paper checks. “But what happens when you have 100 clients or 1,000 or 10,000?” Moore asks. “You have to have a scalable process that works. We are trying to solve the efficiency issues advisors have had with getting paid, to do so efficiently and be able to scale their practice.”