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Will retainer fees replace the conventional AUM model?

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Rianka Dorsainvil launched her RIA, Your Greatest Contribution, two years ago with a retainer fee rather than prices based on clients’ assets under management. The $3,400 annual fee allows her more flexibility in choosing clients, she said, and it sends a direct upfront message.

“My value is not based on what your portfolio does. From an expectations standpoint, I make sure that my clients understand that,” Dorsainvil said in a panel last week at the annual FPA Retreat.

Both Dorsainvil and her co-panelist Eric Roberge overcame initial struggles starting their firms with pricing structures differing from the norm. Roberge, who founded an RIA named Beyond Your Hammock in 2013, started out charging clients $50 per month, which quickly proved unsustainable, he recalled.

But he stuck with it, creating a customized structure around a monthly retainer fee. Roberge’s firm now has more than $4 million in assets under management, according to an ADV form filed in March, up from $2.5 million in AUM last February.

Advocates for retainer fees see them as the future, following the widespread shift from commissions to AUM-based prices in the 1990s and 2000s. Yet the change has played out slowly. Retainers provoke tough discussions within firms about the makeup and level of the fees. They also trigger fears that advisors will lose clients who are accustomed to the standard approach.

“I think there’s a lot of flexibility in combining revenue models,” Roberge said. “As long as you explain that value to your clients, it doesn’t matter. It doesn’t matter where the money is coming from, as long as they know why they’re paying it.”

Retainer fees first emerged after a 1995 NAPFA conference presentation by the founder of the Alliance of Comprehensive Planners, Bert Whitehead. Only 11.5% of fee-only advisors use quarterly or monthly retainers, according to an estimate by Ken Robinson, an early adopter at Practical Financial Planning in Cleveland.

Robinson co-wrote a 2016 study in response, he says, to growing interest in retainers. The Department of Labor’s fiduciary rule, increased competition, a limited market for AUM clients and other factors will eventually drive advisors from AUM fees to retainers, according to the study.

“I don’t think we’ve hit that tipping point yet. I think that day is coming someday,” Robinson said.

The retainer model gives Dorsainvil and Roberge, whose firms are both virtual without physical offices, more appeal among millennial and middle-class clients, they said. Real estate owners, farmers and other business owners also make good prospects for retainers, according to Robinson’s study.

Dorsainvil and Roberge operate their RIAs as members of the XY Planning Network, a group of fee-only CFPs focused on Generation X and Generation Y clients. Roberge charges fees for specific services, as well as a $1,500 engagement fee and a monthly retainer of $199.

Like Roberge, Dorsainvil wrestled with finding a model that would keep her business afloat while allowing her to serve clients not interested in paying the normal rate of about 1% of AUM, she says. She turned away some clients who wanted one-time services rather than long-term advice, she said.

“If you do it for one person, you have to do it for everyone. So I was like, ‘You know what? No,” Dorsainvil said. “With financial planning, it’s not a transactional business. And it is very sticky, just because, as life goes on, things change.”

Commission-based investors want to keep their accounts, regardless of the fiduciary rule.
March 28

Advisors moving their own practices to the retainer model might find the approach anything but simple, though. Carolyn McClanahan made a wrenching decision to set her firm’s minimum annual retainer at $10,000 after “trying to help everyone” when she first began charging retainers in 2007, she says.

McClanahan, a Financial Planning contributor and the founder of Life Planning Partners in Jacksonville, Florida, was tangling with a one-year waiting list for prospects before she made the switch. She now charges the minimum retainer plus $1,000 for particular additional services such as taxes and elder care.

“Our typical client is the millionaire next door,” she said. “For people over $2 million, we are a bargain.”

The AUM model, while more expensive for clients than the retainer in some cases, still makes for a clear-cut approach that is easy to understand, according to its adherents. Its widespread use and reliable revenue have led some to question why firms should abandon it.

“The AUM model is the model for the foreseeable future. Why would anyone give up getting paid [in terms of] AUM? It’s the best thing in the world,” Don Phillips, managing director at Morningstar, said at the firm’s Investment Conference last week.

FPA does not advocate for one form of advisor compensation over others, President Shannon Pike noted. Clients need “fair and full disclosure” of all costs, but debates around fees and commissions might be distracting from more pressing matters, he said.

“You never think, ‘I’m going to go to Doctor A or Doctor B because of the way they’re charging,’” Pike said. “I’d like to see our profession move further and further away from the compensation issue and toward what makes an advisor qualified.”

Yet firms have changed their prices slowly, if at all, in recent years. About 61% of advisors surveyed as part of a 2016 report by the SEI Advisor Network have not made any changes to fee structures for primary clients in the past five years. Almost two-thirds of advisors out of that group have never changed their prices.

“We believe the decoupling of investment advice and portfolio management is underway, challenging the venerable AUM model — though we suspect, and our research confirms, that it is unlikely to change any time soon,” the report said.

The study, like the one by the Alliance, outlines a series of possible structures advisors might employ within the retainer-fee model. Many firms have charged a retainer fee for clients until their assets reach a certain level, at which time they pay based on their AUM.

For Roberge, the evolving industry and ability to cull from a wider client base offers an opportunity for entrepreneurial advisors.

“It’s like investing in a bunch of startups,” he said during the panel. “I will grow with them and adjust my services to fit.”

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