Charging a fixed fee helps advisors explain their value to clients, many of whom don’t understand what they’re paying in the first place, according to industry executives.
It is “essential” for advisors to have simple fee structures and to be able to explain them well to clients, said Jenn Anderson, responsible for the engagement of advisors at Hightower Advisors.
“The more concise and clear a business can be about what services to expect and the fees for those services, the more successful it will be in converting a prospect to a customer,” she said.
Most clients who work with an advisor don’t know what they’re charged, according to a study released earlier this year by State Street Global Advisors. For example, 60% of investors who work with advisers surveyed by State Street mistakenly believe that fund fees are included in the fees they pay to an advisor or investment platform. And only 24% of savvy investors say they “fully” understand the concept of an expense ratio.
Anderson of Hightower said advisers “need to be confident” in the value of the services they provide as well as the value clients place on those services so they can better explain them.
“The trend towards fixed fees is indicative of this need to be clear,” she said.
About 26% of the 1,000 registered investment advisory firms that use the technology provider’s platforms Advyzon charge a fixed fee for their services to some extent, depending on the company.
Fee transparency is becoming increasingly important as consulting firms adapt their service offerings to meet the demands of the next generation of clients, according to Anderson of Hightower.
Hightower primarily provides investment advice through discretionary advisory services, which are offered as part of an unbundled or bundled fee program, according to the company’s March 31 regulatory filing with the Security and Trade Commission. Hightower also has a packaging fee program through which it offers portfolio management services, according to the filing.
Customers generally have a choice of how charges will be calculated for services, and these options include a percentage of customer assets, hourly charges, fixed charges and other fees or service charges, or a combination of these options, the deposit notes.
Advantageous for AF
Jacksonville, Florida-based registered investment advisory firm Sterling Newton started charging customers a fixed fee about six years ago. Prior to that, the company billed clients a percentage of their account assets.
“As we started to explore flat fees, it started to make sense because our level of service needs to stay the same regardless of the type of economy,” said Bill Newton, the president of the company.
Before moving to fixed costs, Newton “had a hard time justifying why customer fees were increasing” according to the asset percentage model.
Charging a fixed fee is also advantageous for the consulting firm, as the asset percentage model tends to be affected by market performance, Newton notes.
The asset percentage fee model is “a bunch of crap.”Sterling Newton
“If your portfolio goes up, our fees go up. If your wallet goes down, our fees go down. And if you really take a look at that theory, that’s a bunch of crap, ”he said.
While strong market performance results in higher costs in this model, poor performance reduces them.
“The advisor can’t control the market, and he always has expenses that he has to pay,” Newton said.
When an advisor’s fees go down, “there’s a good chance” that “their level of service will go down as well,” Newton said. This is what happened during the global financial crisis of 2008, when consulting firms had to downsize, for example, he said.
Meanwhile, advisers are also increasingly charging a separate fee for their financial planning work, driven by a range of factors from improved payment processing to the desire for more stable sources of income. Survey conducted in September 2020 with more than 1,600 advisors by Envestnet MoneyGuide found that 38% of respondents charge a separate fee for financial planning. Of these, 65% charge a flat-rate planning fee, while 18% charge by the hour and 8% charge by subscription.
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