The case for charging flat fees instead of AUM

As financial planning becomes a bigger part of advisors' work, charging clients based solely on assets under management may no longer make sense. Flat-fee models, argue some advisors, can better align a registered investment advisor's pricing with the services it provides.

Depending on the services an RIA offers — specifically, how much they manage clients' investments versus financial planning — a flat-fee structure might make more sense than a traditional model based on receiving a percentage of assets under management.

Similar to when advising clients, "the right model depends on your goal for that business," said David Blain, founder and CEO of New Bern, North Carolina-based BlueSky Wealth Advisors. He spoke on June 11 at a conference hosted by the American Institute of CPAs (AICPA).

To him, the use of AUM to determine fees is a relic of the past, before financial planning became a significant part of the industry. He illustrated the flaws of an AUM-based fee model with two client scenarios: a single client with a sizable investment portfolio but no ongoing planning needs, and a married couple with zero investments but complex financial planning needs. In both cases, the fees would be disconnected from the actual work involved.

Speaking during the same session, Andy Panko, founder and financial planner at Metuchen, New Jersey-based Tenon Financial, categorized flat-fee models into three types: time-based, scope-based or capacity-based. Time-based is similar to some other professional service providers that charge by the hour, and scope-based has to do with charging a fixed fee for a specific project. Capacity-based has to do with the complexity of the task.

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"Complexity is ultimately what maps out your time, your resources, the level of skill and expertise needed — that's what you're delivering," and it isn't "arbitrary" like investible assets, Panko added.

Hourly pricing has multiple advantages, including allowing advisors to have flexible schedules and giving clients an idea of how much they will be charged, but on the other hand, clients might avoid reaching out to their advisors to save money and worry they are being charged too much when junior staff contribute to the work, Panko and Blain said.

Using a flat fee or retainer structure can help RIAs predict recurring revenue, add transparency for clients and fit younger clients who have high incomes but low investable assets, Panko said. He said he now knows about 50 firms using flat fees, up from just five that he knew about when starting his own firm in 2019.

"A flat fee with well-defined scope tiers can perform as well or better" than alternatives, Blain said.

Panko increases his flat fees annually based on inflation, using the Consumer Price Index for All Urban Consumers (CPI-U).

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No fee model is perfect, but there may be a better fit

Both Panko and Blain said no fee model is morally superior to others.

"No fee model's unbiased. No fee model's unconflicted," Panko said.

That said, Blain emphasized the need for consistency in the method of charging different clients at the firm.

Ultimately, advisors should consider a pricing model that makes sense with the services they provide.

"If mostly your value is asset management, AUM might be the thing for you," Blain said.

But for RIAs that focus on financial planning, tax planning and other advice, flat-fee structures deserve consideration, he and Panko said.

For example, Panko helps keep his fee model simple and revenue predictable by serving specific types of clients. Sometimes he has to turn away some potential clients because they don't fit his model. He said he found a niche with single or married clients who are near or in retirement and don't have too small or large amounts of funds and not too much complexity in their finances, and as a specialization, he provides tax planning services.