In this era of fee compression and robo-advice, wealth advisors that provide comprehensive services are becoming less focused on how much they’re charging and instead, focused on how best to structure fees for long-range holistic planning. While no single fee model fits every advisor and client, much has been said about the efficiency of the traditional Assets Under Management (AUM) structure, based on a high minimum level of assets.
Though the AUM model remains the most common, there has been a shift toward alternative fee structures from Assets Under Advisement (AUA) to subscription-based (hourly, monthly or annual retainer) and hybrid approaches. In fact, TheStreet named alternative fee structures and service models in their “Business Trends for Financial Advisors to Watch in 2021,” citing:
“The trend toward alternative fee arrangements is in line with demand on the part of many clients for a more holistic approach to financial advice that is based on helping clients achieve their overall financial goals, not just maximizing the value of their investment portfolio.
“Many in the next generation of clients are looking for different and more collaborative relationships with their advisors. Offering a service and fee model that dovetails with these evolving client relationships is a trend that will likely continue over time.”
“The different types of fee structures we’re seeing across our growing practices are on par with advisors providing comprehensive services,” said Dynamic CEO Jim Cannon. “Good advice is at a premium.”
Cannon notes one such structure, a successful subscription-based model underway at Phoenix-based LifeManaged, as “one of the fastest growing practices that we service today.”
LifeManaged: Pay for financial advice the way you pay for Netflix
On the recent Dynamic Beyond webinar, “Subscription-based Financial Planning,” Cannon recalled a 2019 conversation with LifeManaged founder Thanasi Panagiotakopoulos, who at the time considered the underserved Millennial market as the future of the industry and wanted to grow his practice in nontraditional ways. A Millennial himself, Panagiotakopoulos had worked in private wealth at Wells Fargo where he was expected to become an “immediate producer” of wealthy clients; he didn’t have the ability to help his peers who didn’t have the money or financial literacy and didn’t grow up with financial education of any kind.
Recognizing this “gap in the industry” is what propelled Panagiotakopoulos to launch his own firm that provides a solution for Generation Y. In less than two years, his subscription-based model has grown from zero to $15,000 monthly and zero to 65 lives under management, most of whom are 25- to 40-year-old HENRYs (High Earner, Not Rich Yet). This Millennial subset was defined as “the hottest new prospect” in 2017 by ThinkAdvisor.
“This demographic doesn’t know that they can afford a financial planner,” said Panagiotakopoulos. “They make a lot of money and wake up at 32 with nothing to show for it.”
He describes the subscription-based model as an “agnostic investment model” and “on-demand service” where he and his team are paid for their time, not product sales. “We’re thought of as a true partner, a relationship rather than a transaction.”
Upon initial client meetings, the firm uses proprietary questionnaires and values exercises to understand their client’s lifestyle and how they grew up around money. Using RightCapital’s “clean and simple user experience,” a one-page summary with actionable advice and ongoing support is presented to clients; subscription fees start at $150 per month through AdvicePay, or an upfront fee of $1,800 annually.
There’s no term provision in the contract, however, the LifeManaged team does ask clients for a one-year commitment to financial planning and the understanding that there is significant work that is done up front as well as the ongoing routine planning requirements.
Because investment management is different than financial planning, it’s treated as a separate service and charged a typical AUM fee, explains Panagiotakopoulos. “There are multiple paths to financial freedom. They don’t have to pay the typical one percent investment management fee for us to be compensated for our time.”
Communication is key for subscription success
“The process begins with education and awareness by using our tools and technology, including an Excel spreadsheet I personally use with my family to help them remember where their money goes,” said Panagiotakopoulos.“The first thing our clients are going to get is organization.
“Helping them understand and be aware of how much their life costs has been a huge value-add right out of the gate. Then we provide the accountability and benchmarking for them, making sure they’re on plan—this is ultimately what they’re paying us for.”
LifeManaged’s Director of Planning Ben Fredlake, CFP® explains that in a retainer-based model, it’s important that the firm “stay in front of clients” to demonstrate they’re providing ongoing value. LifeManaged does this by creating and delivering educational content that’s timely and topical, helping clients navigate tax season, open enrollment and budgeting during the holidays, as well as college savings plans and paying off student debt.
“The nature of what we do as advisors is such an intangible thing that conversations, communications and meetings over time build trust and a foundation,” said Fredlake. “Clients over time realize, wow, how valuable this service is and they’re not even touching my investments.”
Swiss American Wealth Advisors: A hybrid approach serves two tax worlds
At Swiss American Wealth Advisors, serving multigenerational clients with U.S. and Swiss ties has called for a hybrid approach to structuring fees that stretches beyond the AUM model.
“I have noticed that clients 55 and older are more likely to think of fees in terms of AUM and prefer its simplicity,” observes Co-founder and CEO Marina Hernandez, EA, CFP®, CEPA. “The opposite is true of Gen X and even more so of Gen Y.”
Hernandez predicts that Gen Z will be the generation that will fully reject the AUM model.
“The AUM model is persistent because it is very profitable and there are still a couple of generations willing to pay those types of fees. The changes are client led, not industry led, as it tends to be with most things in business.”
The firm, with offices in Philadelphia and Zurich, serves a client base made up primarily of Generation X and Millennials, seeking specialized services at the intersection of two legal, tax and securities jurisdictions. According to Hernandez, these clients are more likely to view investment management as a commodity and are less willing to pay high fees for it.
Financial planning centric
Swiss American is financial planning centric as clients tend to have complex situations that require in-depth planning that, according to Hernandez, “complements the more conservative/risk averse Swiss system with the more aggressive/risk taking U.S. one to build greater wealth and financial clarity for clients.”
Three service levels are designed on the complexity of the client’s situation and the level of support they’re seeking. Clients pay a minimum annual fee for financial planning and an additional AUM fee if the firm manages assets.
“Charging a minimum annual financial planning fee allows us to offer very competitive AUM fees that provide great value to clients,” said Hernandez.
Centering the fee on the financial planning aspects of services allows Swiss American to emphasize planning at the center, driving everything they do, including the management of investment assets under the firm’s administration.
Centennial Investment Advisors: ‘The client’s financial ecosystem’
Since 2000, Centennial Investment Advisors in Englewood, Colo., has charged separately for financial planning instead of imbedding it in the AUM fee. The upfront fee ranges between $3,000 to $5,000, depending on complexity. For investments, the AUM model is applied. An optional retainer for financial planning services ranges from $1,200 to $2,500 annually.
According to Matthew Hansen, senior investment advisor at Centennial, the fee structure was designed based on team members’ previous experiences with many other advisors. “From that learning, we determined advisors with the most success in client retention, relationship and share of wallet were based on the type of hybrid structure we have in place, one that was extremely rare 20 years ago,” said Hansen.
“Our business is built on a philosophy that people are willing to pay for quality advice.”
Like Swiss American and LifeManaged, Centennial leads with financial planning to uncover client information, long-term goals, and attitudes that influence behaviors from which they develop a long-term plan with appropriate investments. “This serves the best interest of the client with recommendations and implementation crafted to their unique needs, goals and attitudes coupled with a broad range of products and services that are fee based,” said Hansen.
“From our perspective, this approach offers us a full view of the client’s financial ecosystem.”
The result of Centennial’s philosophy and fee structure: Broader and deeper relationships with clients that have lasted more than 20 years. This advice-driven approach means the firm manages “100% Of Wallet” (investable assets) for all but two clients.
Hansen added, “We believe the success of this structure, both the client and advisor, is successful because it focuses on the client needs and goals, not just the investments.”
The Centennial team continues to evolve the firm’s fee structures. New structures are underway, including income-based subscription services or fees based on total net worth. “We see progress in these movements since they may lend themselves to more depth of advice which leads to more value to the client.”
Although many practices at Dynamic have used or are beginning to experiment with alternative fee arrangements, over 94% of clients with Dynamic are subject to a traditional AUM fee. “We track what’s happening industry wide and find that most of the wealth advisors we work with continue to follow the trend of the industry—that is an AUM fee because it’s easy to explain and comprehensive planning and investment management can be included for a single fee,” said Cannon.
“But, we recognize and support alternative fee structures and encourage advisors to periodically review their services and fees to ensure they’re aligned.”
Photo: Jack Hamilton, Unsplash
Clients should refer to their Financial Planning Agreement, Investment Management Agreement and/or Dynamic Wealth Advisors’ ADV Part 2A Firm Brochure (which can be found on the Securities and Exchange Commission website by searching under CRD #15136) for additional details regarding fees.