If the days of the AUM-based fee are numbered, most advisors haven’t noticed yet.

A small but growing segment of the advice industry argues that deriving revenues from fees based on client assets creates a misalignment between advisor and client interests.

Yet few advisors are abandoning the traditional asset-based fee, according to “Fees at a Crossroads Revisited,” a report by Oaks, Pa.-based SEI Advisor Network released in July 2017.

“More advisors are charging up-front planning fees, combining a real value with a real price, but most advisors now charge an AUM-based fee,” said John Anderson, managing director and head of SEI practice management services. “The percentage AUM fee for everything isn’t aligned very well with clients’ interests. When an advisor can charge a specific price for a specific action, a link between price and value is established.

“In 10 to 20 years,” he said, “we’ll see another movement from AUM to alternative fee structures. Something will spark this change, just as the DOL rule really accelerated the move to asset-based fees.”

For its report, SEI sponsored surveys of 736 advisors and 926 affluent U.S. households in 2018 to gauge advisor and consumer sentiment on fees.

Percentage AUM is overwhelmingly the most common compensation scheme for advisors. In 2018, 66 percent of the advisors in SEI’s survey charged asset-based fees like a percentage of AUM, versus 58 percent of the respondents in the 2015 survey. The proportion of respondents compensated by commissions dropped from 33 percent in 2015 to 23 percent in 2018.

In 2018, 24 percent of advisors report charging a retainer of some kind to their client, up from 15 percent in 2015. This year, 32 percent of advisors charge an hourly or project-based fee for some of their work. Most of these advisors are implementing alternative revenue structures alongside a traditional AUM-based fee, according to Anderson.

“We are seeing more experimentation with alternative fee schedules,” said Anderson. “More advisors are using hourly, project-based and retainer-based fees. Commoditization is pushing advisors to come up with an explanation for what their value is to their clients.”

According to the SEI surveys, only 27 percent of advisor respondents felt pressure to change their fee structure in 2018. Nevertheless, this is a significant increase from 2015, when only 15 percent of advisors felt fee pressure.

A 2018 TD Ameritrade-FA Insight study of more than 320 RIAs found that one in six firm owners placed pricing pressures among the top factors that are challenging their future growth—yet most firms are still unwilling to deviate from the traditional asset-based fees. In a typical RIA, 98 percent of clients are still served with an asset-based advisory fee.

“There is definitely fee pressure in advisory fees, if not fee compression,” said Anderson. “I think, to this date, what we’ve seen advisors do is combat fee compression using lower product fees instead of lowering their advisory fee. Consumers see improvement to their costs and don’t complain.”

AUM-based fees are gaining market share not because they’re better than alternative fee structures, but because they’re the easiest revenue model to adopt for advisors transitioning away from commission-based revenues, Anderson said.

Significant challenges lie ahead for advisors who want to derive revenue from a percentage of their client assets, he said. For one thing, clients have diverse needs and won’t always want an “all-in” AUM-based relationship with a financial planner or advisor.

“The consumer should have the power to get the advice and services they’re looking for without paying for an ongoing relationship,” he said. “This is the way the whole economy has moved. In the old days, you went to a store and picked something close to what you wanted or needed from the available inventory. Now you can go online and get exactly what you want.”

A larger problem with the AUM-based fee is that it has little to do with the actual value being provided by the advisor’s work. Wealthier clients often have to pay more for the same services received by less wealthy clients. At the same time, an advisor’s AUM-based fee tends to remain static whether or not they increase costs by offering more services.

Scott MacKillop, CEO of First Ascent Asset Management, a turnkey asset management platform that itself charges a flat fee for its services, said that the AUM-based revenue model gives consumers the impression that higher-net-worth clients receive the bulk of an advisor’s time, energy and talent.

“The client is essentially being told that ‘the more you pay me, the better job I will do for you,’” he said. “The logic of the model breaks down over time: Is the advisor really going to work harder and do more for a $1.5 million client than they do for a $1 million client? A $500,000 client? If I’m a $500,000 client, that arrangement doesn’t make me feel very good. If I’m a $1 million client, I might wonder if I’m getting second-rate financial advice.”

AUM-based fees also grow or shrink with market forces that advisors cannot control, MacKillop said, meaning advisors could increase the amount of revenue they derive from a client without offering any additional services to that client, and without incurring any additional costs by serving that client.

Some firms are able to justify their AUM-based fees by adding on services, MacKillop said, but many of these advisors will experience increasing margin pressure over time if they keep expanding their roles.

For the time being, AUM-based fees will remain the best way to serve long-standing, older clients, said Anderson.

“For the large block of advisors’ current clientele, I wouldn’t really suggest making a change,” said Anderson. “They’re used to paying it, it’s a decent business model in a frictionless environment.”

Pressure to change fees will come from two directions, Anderson said: first from younger, less affluent clients who will balk at the high cost of financial advice, then from high-asset-worth clients who will demand an explanation for why they should pay a higher price than clients with fewer assets for similar levels of service.

In Anderson’s ideal scenario, advisors would link the price for their services to what it costs them to serve the client.

Consumers have become more fee-sensitive, according to SEI, with fewer of their consumer respondents willing to stay with their advisors if fees are too high or they don’t receive a reduction when requested.

Investors may also like a flat fee model because they know the exact dollar amount they’re going to pay for advice before incurring the expense, allowing them to incorporate planning and advisory fees into their budget. Similarly, a flat fee model also gives advisors more certainty over their revenue generation, said MacKillop.

“Flat fees are advantageous for the advisor,” said MacKillop. “Assuming a stable client base, once you’ve set your price, and your clients have agreed to the price, you know precisely what your revenue will be for the year so you can plan your activities accordingly. Life becomes less volatile for flat fee advisors.”