Wealth management firms that don’t let clients choose between a fixed fee or one based on their assets under management might want to reconsider that.
More RIAs are experimenting with different fee models and young investors are especially interested in less common ones. 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. Older generations were far less interested in them.
Those trends have been progressing for years. But new research suggests they are nearing a tipping point — and signaling to buyers what types of RIAs they should consider acquiring.
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The high retention rate of clients paying asset-based fees has remained steady over the last 10 years at around 95%. But the retention rate of clients paying a fixed recurring fee has improved significantly. In 2020, fixed-fee client retention totaled 97.7%, a higher rate than asset-based fee clients for the first time in at least seven years, according to Herbers & Company, a consultant to RIAs that has worked with more than 1,000 firms and routinely collects data from current and past clients.
Although the difference between the retention rates is small, the trend lines suggest meaningful changes are happening in the independent wealth management industry, according to Angie Herbers, the founder and managing director of her namesake firm.
“We anticipate the trend will continue and the industry will move even faster toward adding retainer fixed fees for service due to client demand for financial advice. AUM firms for the past 10+ years have looked good in the bull market, as things get more volatile, retainer fixed fee firms will increasingly shine,” she said.
For years, the consultancy has been tracking RIAs that charge both asset-based fees and retainers, which is how it arrived at this conclusion. Those companies have the same client experience, yet retention rates have continued to evolve. “These trend lines can only really be seen by studying and working with firms that have both AUM and fixed fee retainer services available to clients, and many industry studies do not break out the [client retention rate] based on pricing structure.”
Herbers’ firm is not an investment bank and does not represent buyers or sellers in transactions. It focuses on helping RIAs large and small grow and innovate their businesses, often in preparation to professionally price their business and explore a sale.
From its internal benchmarking and observations, the consulting firm believes the RIAs that only charge fixed fees are being undervalued.
“If the industry does not value financial advice to the consumer on a fixed fee, history will repeat itself,” Herbers wrote in a note to RIA Intel.
“In early 2008, AUM advisory firms were undervaluing themselves and in the last decade we have seen those values finally come into alignment. We need to see retainer fixed-fee firm valuations align faster to offer room for both to continue to increase and maintain current advisory firm valuations offering only AUM.”
RIAs have an “enormous opportunity” to offer clients a retainer option if they don’t already, either by starting one from scratch or acquiring a retainer-only firm. “100% retainer fixed fee businesses should keep building their firms and hold on and/or consolidate with their peers to grow faster and gain greater market share,” according to Herbers.
Some wealth managers believe different pricing models will compete with each other and somehow cannibalize their business. The consultant has not seen that prove to be true.
“We are seeing it enhance the client experience (CX) and service to clients by giving the client a choice on how they pay their advisor. Within human behavior, giving people a choice and allowing them to own their choices as part of the decision-making process keeps them connected and engaged, regardless if the assets are being managed.”
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.