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Practice and client management RIAs


RIA FEES: FROM PRIX FIXE TO À LA CARTE

By  Don Korn November 09, 2021, 3:39 p.m. EST 5 Min Read
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Tina Hohman, executive vice president of wealth management at Alera Wealth
Services, and Gary Pittsford, chief valuation officer at Castle Valuation Group,
have seen RIA fee models begin to change.
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RIAs overwhelmingly continue to charge fees based on assets under management,
but alternative fee structures, including flat fees, are gaining ground as the
industry fights to pull clients out of brokerages.

Even in the midst of a second tumultuous pandemic year, some financial industry
verities remain in place. For one, registered investment advisors’ fees remain
around 1% of assets under management. According to the latest annual survey of
over 1,800 firms conducted by RIA in a Box in the first quarter of 2021, the
average RIA advisory fee was 0.95%.

Moreover, basing fees on managed assets remains common.



“The AUM model is favored by most RIAs,” said Mark Elzweig, who heads his own
executive search firm in New York. Typically, that’s a tiered fee schedule,
charging lower rates for assets above a certain threshold. In a recent white
paper, Chicago-based financial technology platform Advyzon reported that 85% of
its firms prefer a tiered fee structure.



“The tried-and-true model is easy to explain,” Elzweig said. “There is some
experimentation with flat-fee and retainer models, but with AUM, advisors don’t
need ongoing discussions about fees.”

Chris Cordaro, partner and wealth advisor at RegentAtlantic, a wealth management
firm in Morristown, New Jersey, agreed.

“We are on the old-school AUM schedule,” he said. “It’s simple, easy and it
works. Flat fees are great for the consumer but tougher for advisors who may
have to renegotiate fees each year.”

But that doesn’t mean some advisors aren’t exploring new pricing options in
quests to attract or retain clients.

Changing times
The AUM pricing model might not be right for all RIAs and clients. Indeed, some
RIA firms already have found that flex planning on fees can make financial sense
and some are considering a multiple choice menu of pricing models.

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“At industry events, a leading trend is that à la carte pricing would be on the
rise,” said Tina Hohman, executive vice president of wealth management at Alera
Wealth Services in Deerfield, Illinois. “Our firm charges a percentage of AUM,
but the next generation of clients likely will look for other fee models.”

Mike Papedis, managing partner and founder of Fusion Financial Partners, a
Carlsbad, California-based RIA consultant, said that high net worth and
ultrahigh net worth wealth advisors, family offices and asset managers use
tiered fees, flat fees and, occasionally, performance-based or hourly fees. “The
new trend,” he said, “is estate planning fees being separated from AUM fees.”

Looking ahead, Earl McAlear, vice president of strategy and business development
at Broadridge, a financial technology company based in Lake Success, New York,
said the demands of the next generation of clients will require more fluidity in
pricing and fee models. “These clients expect flexibility in how their money is
managed, in the way their financial plans are established and in the fees for
their interactions with advisors,” he said.

Successful RIAs may have to tailor fees to individual clients and revisit those
charges regularly, McAlear added.

Favoring flat fees
While AUM charges remain common, other types may be used alongside, especially
flat fees. Advyzon found that 25% of its RIAs with less than $100 million in
assets use flat fees, and that level increases to 36% for RIAs with more than
$100 million in assets.

“Anecdotally, the number of firms introducing some sort of flat-dollar billing
is increasing,” said Charles Rowlan, senior vice president of development at
Advyzon. “The revenue from flat fees may be small for most firms, but it’s
increasing. A minority of RIAs bill entirely or almost entirely using a flat
fee.”

According to Papedis, flat fees especially gain traction in large family
offices, as wealthy families like knowing their fees can pay for advice ranging
from lending, financial planning, family governance, insurance, taxes and
multi-generation account aggregation to concierge service.

As he noted, RIAs increasingly offer estate planning.

“Many households resist starting or executing an estate plan due to the high
cost of using attorneys, who may charge $3,000 to $6,000 for a simple estate,”
Papedis said. “To solve this problem, advisory firms are adding technology that
can deliver estate plans at a fraction of the cost. Providing such plans gives
RIAs a competitive advantage, enabling them to become the quarterback for the
estate planning process. Furthermore, this arrangement leaves the highly complex
or very wealthy situations for estate attorneys, so those potential referral
relationships can stay in place.”

Encouraging words
Some advisors report success with mixed fees or even non-AUM tactics.

“We have recently moved to a system that blends retainers [variable minimums
based on service and segmentation levels] and AUM basis points,” said Brent
Brodeski, CEO and financial advisor at Savant Wealth Management in Rockford,
Illinois. “I think it’s the best of both worlds.”

Gary Pittsford, chief valuation officer at Castle Valuation Group in
Indianapolis, sees a significant amount of non-AUM fee income.

“Many of our clients are business owners who may have substantial wealth but
relatively little in the way of investment assets to manage,” he said.

Advising such clients, who may have business-related real estate in multiple
states, can be very complicated.

“We might spend a great deal of time working with their attorneys and tax
professionals,” he said. “For such clients, we supplement the asset management
fee with retainers, which typically cost $1,000 to $3,000 a quarter.”

Sheila Chesney, principal at Chesney & Co., a wealth management firm in Sheldon,
South Carolina, has shifted to non-AUM fees recently.

“In prior years, we split our fees between a financial planning retainer, based
on the complexity of the client’s situation, and an asset management fee,” she
said. “It did not appear that advisors could provide financial planning advice
if they were compensated only by AUM.”

Over time, Chesney said, clients were becoming more resistant to paying fees.

“At the start of 2020, we converted to fixed retainers,” she said. For Chesney,
one factor behind this move is that regulatory issues are “making it harder to
justify an AUM fee. If you can’t prove continuous and regular supervision, you
are toast.”

Just as is the case with financial planning tactics, advisors may have to
demonstrate justifiable reasons for the type of fees they impose — and the
resulting amount that comes due — to regulators as well as to clients.

Don Korn
Freelance writer
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Practice and client management RIAs
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