As part of the new plan, the firm decided to raise fees and introduce a retainer structure as part of a more holistic service model less focused on asset returns, Haubrich says. The retainer model is based on a $5,000 fee that includes a flat fee, a percentage of total net worth and a percentage based on a client's annual income. The retainer is fixed for 24 months.
For this the firm would monitor the client's ability to reach his life objectives within prescribed timelines under the financial plan, and would also manage all the various components of net worth, from the client's investments and real estate to his debt. The firm's services also include tax planning and preparation, as well as career advice.
He planned to roll out his new pricing plan at the start of 2009, but says he decided to delay it a few months to avoid the impression that he's changing the rules of the game on clients at a time when their assets have gone south.
AUM Debate
The market downturn puts the spotlight on fee structures, particularly those based on AUM. This fee model is great when the market is up and new accounts are gushing in, but it's a huge drag when markets tank. And even in good times, some advisors question the wisdom of the AUM format.
"I always thought that billing under AUM was a faulty model to begin with," says Carolyn McClanahan, a planner and founder of Life Planning Partners Inc. in Jacksonville, Fla. "I switched entirely to flat retainers a couple of years ago. I have consistent cash flow, don't have to calculate fees, and my clients love it. I feel this greatly reduces the mixed message that investments are more important than financial planning, as investments are only part of financial planning."
A retainer model looks a whole lot better now to a lot of advisors. "I was committed to moving from AUM to a retainer model but didn't do it in time," says Eve Kaplan, a planner in Berkeley Heights, N.J. "I'm pretty sure many advisors will consider some retainer model that doesn't tie them to markets as much. We've all learned a bitter lesson from the market declines."
Haubrich puts it more emphatically. "Even for firms like us who do a lot of holistic planning, we got addicted to the dope of the AUM model."
But not everybody is ready to trash that model. Retainers may work great in flat or down markets, but aren't great in up markets because you can't get leverage.
"Pricing isn't just a function of what drives profitability," says Tibergien from Pershing. Whether the fee is asset-based, paid as a retainer or paid hourly, it should be "what's best aligned with your service model," he says. He adds that asset-based pricing might be best suited for advisors who position themselves as investment managers, while those who consider themselves wealth managers might consider supplementing asset management fees with hourly project or retainer-based pricing.
Philip Palaveev, the president of Fusion Advisor Network and a longtime industry consultant, believes AUM is a good model because it aligns the interests of advisors and clients. "I think it's a complete fallacy to say, now that revenue is down, that you should abandon the AUM model and charge in different ways," he says.