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.