The following is in response to Bob Veres’ article, The Alternative to AUM-Based Fees: The Total Profitability Retainer Formula , which was published last week:
Dear Editor,
I run a fee-only practice with just under $100 million in management and we are right at the point where we have to focus on client service policy, infrastructure, technology … and specifically communicating our message so as to attract only ideal clients for our practice. Our niche is the retirement-ready – usually age 50+ - with $500K (and up) to invest. It is at this time period in a client’s life where financial planning is paramount; the impacts of the decisions that they make right now may be more impactful than at any other point in their financial lives. Often these decisions are “one-time-shots” that cannot be undone. Approximately 80-90% of our efforts go into planning and only 10-15% into investment portfolio management.
I challenge you to try to do the following things consistently:
- Convince a “mass-affluent” client who does not have $500K moveable to a $6,000+ annual fee for your service… (even if they have wealth).
- Retain planning-only clients who require annual cash flow to meet their spending needs .
- Create decent equity in your business using a retainer model versus an AUM model for the mass affluent.
- Make a decent living (adequate take-home pay and a professional office) using an hourly-based or retainer model (in the mass affluent market).
- Provide top-notch, superior investment management services without a decent portfolio management system, and an institutional custodial interface (I love those advisors who think they can “custody the client’s assets anywhere” and do a remotely decent job of tax-harvesting and rebalancing 300-500 accounts when they need that service).
I have been a dedicated student of the financial planning profession for a long time, so I’ve heard, evaluated and tried all of the ideas for compensation models. Your retainer model probably works for advisors whose clientele are very upscale households who need family office services or young professionals making many hundreds of thousands of dollars a year. But for most clients – the mass affluent – my experience has been that the AUM model works very well if:
- You stick to your minimums and you know your business metrics inside and out;
- You are willing to negotiate win-win relationships – manage all a client’s assets, but don’t necessarily charge on it all – so there isn’t always that feeling of a conflict of interest or a “money grab” on your part;
- When it is better for the client that you manage an account (like a 401(k) rollover) then you must quantify it net of fees. Otherwise, don’t move it just to charge on it;
- If a new client can’t meet your minimums, explain why the minimums are necessary, and see if there is still room to work together in a win-win scenario. If not, then refer them elsewhere;
- You are supremely confident of the value that you bring and you can explain it well. And you are really, really good at what you do.
Because I have seen many articles on this topic recently, I doubt whether someone has actually cracked the code on separating an advisor’s revenues from the amount of money he or she manages. That is a tough one – in the real world (as opposed to one that unicorns might inhabit) even wealthy clients shop at Costco and are invited to dinner seminars where they can eat for free and see what the “advisor of the week” is offering.
Jonathan N. Castle, CFP®, ChFC®
Managing Partner
PARAGON Wealth Strategies
Jacksonville, FL
