Still, the reduction in fees came at exactly the same time our workload increased dramatically, something that happens during bear markets. This disconnect is often cited in criticisms of AUM billing. I agree. That stinks.
However, I also hear people touting annual fee or subscription fee practices as being immune from those revenue declines. From what I’ve seen, the degree of immunity depends on the types of clients and the planner’s communications.
In fact, many non-AUM planners I’ve had conversations with are seeing revenue declines too—their clients have lost jobs, experienced pay cuts (or fear pay cuts), and thus are asking for discounts or not renewing. Some of these clients said that since asset values were down, their fees should be lower.
One guy I’m familiar with who runs a planning-only, flat-fee practice and outsources to a prominent robo-advisor was confronted by a client who said, “You recommended them, and I have lost a ton of money, so I want my money back.” The client proceeded to question the advisor’s due diligence, asking whether he really knew what was happening with the portfolio. Ouch!
I’m not suggesting that one billing method is better than another. Each method has pros and cons; some are better matches for clients than others. But in any case, I think clients who are laid off are more likely to make better decisions when they keep a good planner, regardless of how the planner charges. The attitudes of the unhappy clients simply show how important it is to have clear communications with them and manage their expectations.
One last observation. We have been approached a few times over the years by big outfits wanting to “partner” with us. The names of these groups would be familiar to all who read this publication. There are different philosophical approaches to partnering, but the typical financial arrangement is one in which a new partner buys some portion of your earnings before owner compensation (EBOC).
I think of a firm that has taken such an offer recently and the scary situation it was looking at. After the coronacrash, the original owners of this firm would have seen either little or no profits because their new partners would have been paid their share first out of the reduced EBOC. If this were the 2008-2009 period, those original owners would be looking at further pay cuts and would possibly have to raid the proceeds from the sale they’d just closed. Double ouch!
Those deals work for a lot of firms. That’s why there have been so many done. But it is also likely that some were done because the owners couldn’t find other outside buyers or couldn’t develop buyers internally.
Regardless, it strengthens my resolve to keep evolving our succession plan so that it can better withstand the inevitable swings in financial markets, especially if things go poorly at the most vulnerable time.
Dan Moisand, CFP, has been featured as one of America’s top independent financial planners by Financial Advisor, Financial Planning, Investment Advisor, Investment News, Journal of Financial Planning, Accounting Today, Research, Wealth Manager and Worth magazines. He practices in Melbourne, Fla. You can reach him at [email protected].