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Ensuring Success When Switching to a Flat Retainer Fee Model

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Like a hot stock or predictions on the next rate hike, interest in alternative compensation models is rampant. Smart clients are asking more about fees, and pending fiduciary requirements will surely improve fee transparency. At the same time, investment management is becoming commoditized and advisors focusing only on investments are facing significant fee compression. What can an advisor do to remain competitive?

When I started my firm in 2004, I studied the payment models in vogue at the time. It was important to me to be fee-only, and the feasible choices were hourly charges or AUM-based. The choice was not difficult; I can talk too much and didn't think I would be good at cutting it short. I also planned on a holistic life planning practice and didn't want a clock ticking in my client's mind as I asked them about deep dive issues. I chose the AUM model.

But charging based on assets created a conundrum for me. I had clients who needed considerable planning and didn't have many assets to manage. Likewise, clients with significant assets and fairly simple plans were paying me a lot more. During those initial years, I read articles by Bob Veres (a Financial Planning columnist) on retainer models, and benefitted from a study group that included Kathleen Rehl, an early adopter of flat retainers through her membership with the Alliance of Comprehensive Planners (formerly the Alliance of Cambridge Advisors.)


In 2007, I made the leap to retainers. I analyzed my time, depth of work and value I provided to each client. My goal was to be revenue neutral in the transition but more fairly allocate fees to reflect the actual work I did with each client. Naturally, some clients had an increase in fees, some had a decrease and many clients had no change. Fees were fixed for two years. All but one client loved the switch.

Through the help of my business coach, Tracy Beckes, I developed clear client engagement standards outlining services I provide and what I expected from clients in the working relationship. In addition, I decided to move to an ensemble model with two planners splitting the planning and a Chartered Financial Analyst responsible for investment management.

The engagement standards were vital to the success of the retainer model. We make it clear that the focus of our work is comprehensive planning – of which passive investment management is only one part. Before we agree to take on clients, they have to agree with our investment philosophy. Many of the engagement standards stress that our fees are based entirely on complexity.

To ensure clients are receiving ongoing value, we review insurance, projections, tax planning, investment policies and estate plans separately throughout the year. We deliver the reports to their electronic vault by email with a synopsis stating, "We do/do not think anything needs to be done at this time. After you take a look, let us know your thoughts." On average, we have about two in person or video meetings per year. This is driven by the needs of the client, not by a timeline or touch schedule. Our clients appreciate the ongoing planning without their prompts and like that we pay attention to their morphing financial life.

Because we do a good job of investment education up front, few questions arise about actual investments. Our investment specialist often laments that few clients want to talk to him. Instead of spending our time picking stocks, trying to predict the future and explaining returns, we spend our time doing what matters most to clients -- helping them enjoy the present and reach their life goals.

Most new clients come through referrals and already understand how we set our fees. Higher-net-worth individuals grasp the benefits for them quickly, especially if their planning needs are relatively straightforward. The bigger challenge is clients with high planning needs with little money to invest, which usually includes small business owners. We tell them: "Try us for a year, see if we provide value and, if not, fire us." Potential clients sometime ask if fees will go down after we get the client "straightened out." We stress that we are generally underpaid for the first year because of the work involved.

A few clients have left since 2007, mostly due to death. A couple of clients agreed to the engagement standards on paper but not in their hearts. We didn't recognize the red flags when they signed and have worked on improving our intake process.


There have been struggles. We had the fortune/misfortune of growing too fast, and it was hard to keep up with the workload. Plus, it took a while for me to get the right co-workers on the team. By instituting waiting lists for clients and getting coaching on better hiring practices, we are on a sustainable path. We continue to refine our processes to be more efficient and deliver great value.

One presumed advantage of AUM is the automatic increase in fees as assets and markets grow. Yet markets don't always go up, of course. Why should our income be subject to the whims of markets no one can predict? Although I didn't change to a retainer model to protect cash flow, it was a great bonus during 2008 and 2009. Another factor: We address fees every two years. We keep track of what we do for clients through Salesforce; through the past eight years, most clients have periods of increased work that warrant an increase in fees.

Each fee cycle, we provide a detailed letter to clients in regards to their fee status, even if fees don't change. For example, last cycle we did not change fees on 53% of clients, raised fees on 42% and lowered fees on 5%. Revenue per client over the two years increased an average of 6%, not counting new clients. Some fee increases were significant due to issues related to trust planning, business planning, career management or life transition issues. Clients are well aware of their challenges and spelling it out in detail helps them recall the value we provided over the previous two years. The letter is a time-consuming process, but well worth the effort.


It remains to be seen how our compensation model will translate when it comes time to transition our practice to the next generation. I love what I do, and have no intention of quitting until I can no longer serve our clients well. Instead of relying on the sale of our practice in my old age, I am saving for the future, so the transfer value of my practice is not factored into my retirement savings.

For some, this model may not be their definition of success. But the beauty of this industry is the various paths we can take with how we do our work. Thankfully, consumers are becoming better educated, and they will drive the change toward what works for them. For many, the retainer model will be the right fit.

Carolyn McClanahan, a CFP and M.D., is a Financial Planning contributing writer and director of financial planning at Life Planning Partners in Jacksonville, Fla.

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