Client fees — a sometimes contentious topic in wealth management — appear to be changing. A new report indicates more advisors are offering to charge clients a flat or fixed fee, a move some advisors are wary of.
Advyzon, a company that provides portfolio management, client reporting, and customer relationship management software to wealth managers, analyzed data from 800 of its RIA customers and found that 26 percent now include flat fees in their pricing structure. The firms analyzed were in 48 states and Puerto Rico and ranged in size (although half of them managed about $100 million in assets).
Few RIAs are charging clients flat fees exclusively. The majority offer fixed fees in addition to fees based on a percentage of assets under management.
Advyzon said its RIAs typically charge flat fees quarterly. It has not done an analysis to determine the average cost of a flat free.
The report was the first time Advyzon analyzed what portion of RIAs offered flat fees, so the exact growth of the practice is unknown. The company has noticed more RIAs doing it and plans to keep track going forward.
“We are seeing more firms, anecdotally, offering a flat-fee type structure, at least in some capacity,” Charles Rowlan, senior vice president of business development at Advyzon, told RIA Intel.
The types of fees wealth managers charge clients have been steadily evolving for years. (In a 2017 survey of nearly 1,000 advisory firms, half said they offered AUM-based fees as well as fixed ones of some kind, such as for a financial plan.) Several things are motivating RIAs to charge clients flat fees.
As Covid-19 began more rapidly spreading in the U.S. in the spring of 2020, a market downturn meant the value of portfolios fell and AUM-based fees fell with them. Flat fees are fixed, no matter what’s happening, so charging them makes a wealth manager’s revenue more predictable.
Recent research showed that, in 2020, RIAs also retained more clients paying flat fees (97.7 percent) than AUM-based fees, which might encourage more wealth managers to offer flat fees.
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Younger clients, increasingly accumulating wealth and seeking financial advisors as they age, also prefer flat fees. A 2021 J.D. Power survey showed 74% of millennials would prefer to pay for full-service wealth management via a one-time fee-for-service model and 73% said they preferred a recurring fixed fee, or subscription, model. Just 42% of older investors support a fee-for-service model and 34% support a subscription model, all of which are encompassed under flat fees.
Wealth managers that only charge AUM-based fees typically won’t work with a client unless they have a considerable amount of money to invest in taxable accounts. Flat fees attract investors who want to work with an advisor but don’t meet those minimums.
“If you look at segmentation. The flat fee tends to be most popular on the ends of the spectrum,” Rowlan said.
Flat fees also keep the wealthiest investors from paying an AUM-based fee that, in terms of dollars, could feel hard to justify.
“If you only have $20,000, and if I charge 1 percent to manage it, that’s only $200, right? So, that’s not a fair arrangement for myself and the client,” said Amir Noor, an advisor and the director of financial planning at United Financial Planning Group, a firm that generally requires a $100,000 minimum to manage a portfolio.
Noor, who charges clients mix of flat fees and ones based on the investments he manages for them, says flat fees can be a way to recruit underserved clients who have never used a financial advisor before or are unsure of their value.
“Creating an environment where someone can pay, you know, a couple hundred dollars a month and have effectively a financial coach, that’s a great thing,” he said.
Noor said 40 percent of his new clients start as fee-based but 80 percent of them eventually transition to a percentage of AUM.
“If an advisor is serving a client with $4 million and they’re also serving a client with $5 million, are they really that much different? And if not, then maybe it doesn’t make sense to charge those two individuals a different amount of fee,” Rowlan said.
Some RIAs are unsure if charging a flat fee is the right move.
Jeff Reddick, founder of Texas-based RIA Guideline Capital Management, only charges AUM-based fees, which he said are fair given his expertise helping accredited investors gain access to alternative investments. “I could do a lot of stuff that they literally cannot get on their own because they don’t have access to it,” he said.
Reddick would only consider charging a flat fee if he could figure out what to charge for his services. It would be difficult to convince some investors who has never worked with an advisor, or who are less wealthy, that a flat fee was worth it, he said. He could charge those clients less, but he doesn’t want to discount his services.
“That’s where I really have a challenge,” Reddick said. “How do you get fairly compensated without scaring people away?”