Wealth professionals moving from commissions to fees may consider moving beyond asset-based models
As the industry takes a closer look at commissions and how they could impact the quality of advice, more wealth professionals are moving toward fee-based compensation. The go-to scheme for many is the traditional asset-based approach — but there may be better models to follow.
A new report titled The Future of Fees: Real Life Pricing innovations in Wealth Management suggests that the popular approach of aligning fees with assets has not aged well, according to ThinkAdvisor. Given industry movements toward a fiduciary standard, the increasing emphasis of holistic planning over investment management, growth in younger client bases, and other trends, there must be more flexibility in fees.
“The future of fees … will be characterized by more diversity where a variety of fee structures will emerge to meet the needs of new and underserved client segments, and changing market conditions,” said Wei Ke, a managing partner in the global banking division of Simon-Kucher & Partners and co-author of the report.
The report argued that increasing dominance of low-cost offerings would inevitably lead to low-value offerings. To prevent that from happening, advisors have “to innovate on price and grow profitably.”
With that in mind, the report discussed eight different fee structures that could be used to serve a variety of clients:
- Charging by the hour
- A three-part fee made up of an up-front flat fee, an hourly fee or retainer, and a fee based on AUM
- Annual fixed fees depending on the complexity of a client’s situation, which could impact an advisor’s workload
- A “McDonald’s Menu” that bundles hours for different planning packages
- A “Gen X” Model that links advice fees to income and net worth, which accommodates Gen-X clients that don’t have many liquid assets
- A subscription-based model that has clients paying based on their investing/financial planning style:
- For collaborators – an upfront and monthly fee for financial planning;
- For delegators – an upfront fee with higher monthly fees for financial planning and investment management; and
- For do-it-yourselfers (DIYers) – a single fee for a one-time financial plan
- A “Super-Retainer” that includes one fee for stand-alone investment management plus fixed fees based on services
- Modular AUM-based pricing, wherein prices vary depending on the level of service to allow discounts based on clients’ willingness to pay
“Rather than joining the price war, we recommend changing the game through fee innovation,” said Matthew Jackson, director of the firm’s global banking division.