Tags: Advisor businesses | business strategy

The things we’re taught in school may or may not serve us well as we travel through life. Some of what we we're taught is a necessary component of learning certain skills. Others need to be let go after we go out on our own. In some cases, unlearning certain ways of thinknig may hold the keys to our ultimate success.

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Tags: Advisor businesses | teams

Developing a successful team may seem to be as simple as finding people with complementary skills. Yet, that simple formula has the potential to work against you and to create a group of people who become more entrenched in their own expertise at the expense of working together to serve clients.

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Tags: Advisor businesses | compensation | investment advisors

As I write this article, I’m feeling pretty good from a cash flow standpoint.  After all, the market was cooperative last quarter and my bank account is grateful.  I, like most of you, bill quarterly based on assets under management.  Yet, talking with other advisors and attending sessions at conferences have left me questioning my billing method. 

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There are several reasons why this way of billing might not be ideal.  First, we’re wealth managers and we want our clients to know that our value is from more than just managing investments.  Second, our revenue is very dependent on market performance.  Third, fees are taken out of accounts in big chunks only four times a year.

As wealth managers providing financial planning, retirement advice, and other consulting services in addition to asset management, why do we bill solely based on how much we’re managing?  How can we expect our clients to value our full suite of services when we give it away for free?  And, how can we expect our clients to not focus on performance when their costs solely depend on that?  Additionally, fee-only advisors are not supposed to take commissions, neither are CPAs.  How different is taking a percentage of AUM from taking a piece of performance?  

Basing fees on AUM can drastically impact our profit margins.  When the market drops, our bottom line is slaughtered!  Remember a few years back?  As an example, let’s say your gross revenue is typically $500,000 and expenses are $350,000.  Net income is $150,000.  Now, factor in a 20% market decline; revenue falls to $400,000 and expenses stay the same!  Income plunges 67% to $50,000!

Quarterly billing makes the influence of only four days’ performance unduly important.  Our clients’ accounts are hit up in large amounts four times a year as opposed to more even withdrawals.  And, we only get a payday four times a year.

So, what is the answer?  I’ve heard several ideas, among them: 

   1)      Charge a retainer fee instead of percentage of AUM.

   2)      Charge a combination of retainer fee and percentage of AUM.

   3)      Bill monthly.

   4)      Offer different levels of service.

   5)      Bill based on clients’ total net worth, not just AUM.

There are arguments pro and con for each of these methods.  I haven’t made any decisions yet as to how, when or what.  Monthly billing could make sense, but it would need to be weighed against the added administrative burden.  I’m leaning toward a combination of retainer and AUM fees, with the retainer based on complexity, level of service and total net worth.  And, I think to implement it, I’d need to talk to my clients first and price it so that the net amount is about the same as what they’re paying now.  (I’ve found that most advisors who move to retainer fees charge less!  I’ve never figured out why they would do this.) The advantages to me are obvious – less dependency on market performance and I can move toward charging higher amounts to clients who require more work and resources.  The clients might more easily understand my value as more than a money manager while enjoying a more level payment amount.