Not every client has ample assets to manage. Business owners, for instance, may have wealth, income and pressing needs for financial advice — but they also might have most of that wealth tied up in their company. Other prime prospects could own illiquid assets rather than traded securities. Nevertheless, advisers can serve such individuals and their families while getting reasonable compensation for doing so.

If collecting fees for handling assets under management isn’t feasible, how can advisers be compensated? “We work mainly with family business owners,” says Gary Pittsford, CEO at Castle Wealth Advisors in Indianapolis. “Also, some clients’ assets are largely investment property or stock options. In many of those cases, we get paid by a quarterly retainer.”

This retainer, according to Pittsford, is based on how much time he expects his firm to spend with the client.

“Besides direct contact, we might be working with the client’s attorney on a succession plan, discussing taxes with the client’s accountant, reviewing real estate leases, and so on,” he says. “We get paid for our efforts. If our estimates are off in one year, we’ll adjust the retainer the following year, up or down.”

Gary Pittsford, CEO of Castle Wealth Advisors, sometimes asks clients to pay a quarterly retainer.
Gary Pittsford, CEO of Castle Wealth Advisors, sometimes asks clients to pay a quarterly retainer.

Such fluctuations in the annual retainer are not uncommon. “In the first year of working with a business owner, more time can be involved, to get the plan in place,” Pittsford says. “Then less time may be needed, for years. Our hours might pick up again in a year when we help plan for a sale of the company.”

CLOCK MANAGEMENT
To determine the actual amount the client ultimately will pay through quarterly retainers, Pittsford uses the number of hours worked and the hourly rates of the personnel involved. “One of our senior people may spend 10 hours putting a draft report together,” he says, “and I might spend three hours going over that report and making changes. The client would pay for 13 hours altogether, at two different billing rates.”

Pittsford says that clients readily accept such a payment approach, once it’s explained. “They typically hate to pay commissions, but they’re glad to pay consulting fees,” he adds. “What’s more, our fees usually are less than they’re paying lawyers.”

A similar experience is related by Jane King, president of Fairfield Financial Advisors in Wellesley, Massachusetts, who charges an annual flat fee to clients whose engagement calls for compensation beyond AUM. “I hope the flat fee will cover the amount of time and effort involved,” she says.

Jane King, founder of Fairfield Advisors, charges an annual flat fee to clients whose engagement calls for compensation beyond AUM.

“If it turns out that I have underpriced this annual fee,” King says, “I will try and renegotiate at the start of the next year. I communicate that I was wrong in the first fee quote and would like to come back with another proposal for continuing the project. Once I explain the situation to clients, they usually are amenable to changing the fee.”

King also uses a flat fee when she is asked to act as a trustee of a portfolio for which she is not managing the money. “Real estate is the main example,” she says. “Sometimes we pay all the bills for the property; in other cases there is a renovation that we’re overseeing from a financial standpoint. Flat fees are not a major part of our practice. Instead, they usually cover another responsibility that we take on in addition to managing the client’s portfolio. We would not take on a flat fee project if that was all the client wanted us to do.”

To calculate these flat fees, King doesn’t have hourly rates in mind. “It’s more a matter of estimating the effort it will take for the people at the firm to perform the required tasks,” she says. “We all talk it over before naming a number.”

SETTING THE BAR HIGH

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Firms have a range of approaches they use for compensation that doesn’t involve assets under management. These include quarter retainers, annual flat fees, minimum annual fee and maximum total fees.

Planners who prefer not to be involved in such estimating and explaining can avoid these issues. “We have a substantial minimum,” says Janet Briaud, chief investment officer and partner at Briaud Financial Advisors in College Station, Texas. “Our clients generally have very liquid assets, so we have one fee structure for all. We have worked with younger clients, charging a $5,000 flat fee to do all of their planning, but otherwise we have not charged a retainer for nonliquid assets.”

Some advisers might focus on compensation via AUM, but others prefer a mix. Sheila Chesney, principal at Chesney & Company, private wealth managers in Sheldon, South Carolina, reports an approximate 35/65 balance (planning fees/ portfolio management fees) in her firm’s total compensation. “I’ve always believed that what people don’t pay for, they do not respect,” she says, “so I have always charged for financial planning and for portfolio management separately.” Chesney’s planning fee is an annual retainer, based on the complexity of the client’s situation and the need for personalized consultation.

“In 2011, we began to talk with our clients about fees,” Chesney says. “Our clients were getting wealthier, and they wondered if they would continue to pay us more and more forever. I realized that if I were my own client, I wouldn’t like that. Therefore, we put a maximum total fee in place for planning and portfolio management. Our ADV states that we reserve the right to raise our maximum as a result of inflation, which we did for the first time for 2017. About 20% of our clients reach our max. So far, our clients appreciate it — some even ask if that is really fair to us.”

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“We put a maximum total fee in place for planning and portfolio management. So far, our clients appreciate it – some even ask if that is really fair to us.” -Sheila Chesney, principal at Chesney & Company

Chesney’s experience indicates that the line between AUM and non-AUM fees may not always be obvious. “About 50% of our portfolio recommendations are in private partnerships,” she says. “We love this space, and we spend a lot of time finding good opportunities for our clients. Our standard AUM fee doesn’t differentiate if the client participates in private partnerships, which most of them do. However, for clients who participate extensively in private partnerships, we automatically consider this to be a complex planning engagement” and charge accordingly.

Private deals, though, may not be easy to value, for purposes of setting AUM fees.

“We rely on the valuation from the managers, who must provide us with an annual letter, even if that letter says that the current value cannot be estimated to be different from the client’s original investment amount,” Chesney says. “Whatever the investment manager stipulates is what we put into our portfolio reporting. Many of these investments are maintained on our books at original investment amount, which does impact portfolio reporting. However, we educate our clients on this and we are comfortable with the cost to us, because it will reverse over time.

Ultimately, private deals may be valued more realistically, hopefully bringing both more wealth to clients and higher fees for the firm.

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Donald Jay Korn

Donald Jay Korn

Donald Jay Korn is a contributing writer for Financial Planning in New York. He also writes regularly for On Wall Street.