He notes that a 100-basis-point asset fee--more or less the industry standard--is a healthy rate that anticipates markets going down every five years or so. "We have to remember that we've had some really good times in this industry, and we should be financially prepared to weather this storm," he says.
An asset-based fee structure might look ugly now, but at least one industry watcher expects it to remain king. "I think factors linked to holistic planning are becoming a way to meet the needs of aging clients, and might be of more interest to advisors because the standard AUM model isn't as lucrative as it used to be," says Chip Roame, managing principal at Tiburon Strategic Advisors in Tiburon, Calif.
"But ten years from today, we're still going to be 90% AUM," he continues. "We'll write lots of articles and will talk about changing it, and a few people will go there, but AUM will remain the rule. Big industries change very slowly."
As for advisors now stuck in the AUM muck, Roame suggests holding the line on fees. "I don't think defending your revenue base is a good thing to do when clients are seeing their retirement plans tumble," he says. "I think the thing to do is take it on the chops and help them, and not find new ways to make money off of them."
Cost Cutting
Steven Podnos, who runs a one-man shop called Wealth Care LLC in Merritt Island, Fla., estimates his asset base declined 20% to 30% during the downturn from a peak of $120 million, and even though all but a few of his roughly 70 clients pay their fees based on a percentage of assets under management, he's not sweating it. Trained in pulmonary critical care, Podnos was a full-time physician for about 20 years before he became a full-time planner seven years ago, and he says lessons learned from his past career come in handy now.
"Having done a medical practice for many years, I understand overhead and staffing," he says. "I set out with the goal to keep overhead as low as possible so my fees can be reasonable. My fees are a little lower than average, but I get to keep more of it myself. So even though my asset base is taking a big hit, I'm still making decent income and I don't feel any great pressure. I'll have less income, but will spend a little less until the money comes back."
His fees start at 75 basis points annually on the first $1 million. The second million dollars is billed at 50 basis points per year, and everything over that is billed at 25. "I view it as a boutique practice," he says, adding that his office probably costs about $10,000 a year and that his total overhead runs about 15% to 20% of gross income.
Others aren't as nimble. Joe Duran from United Capital says his company held discussions with one sizable advisory firm whose revenue dropped from $8 million to $5 million and was forced to fire half of its 35-employee staff. "How will they maintain service standards and growth projections?" he asks. "What we've seen in the past is that advisors are way too slow to adjust their cost structures. Today, there's a serious fork in the road and I think we'll see a lot of financial advisors fail."
The current market maelstrom is testing advisors in more ways than one. "It's a time to earn your keep as a financial advisor," Tibergien says, "but it's a time when you prove your worth as a manager, too."
Cost-cutting isn't the key to long-term prosperity, he says, but it can be a short-term aid in tough times. Tibergien's suggestions: divide expenses between "need to have" and "nice to have" categories. The former includes certain key employees, who should be well compensated for their work. The latter includes a range of items that, though they may be desirable, can be resisted-industry conferences you can skip, travel you can limit, or computer and software purchases you can postpone.