Asset-under-management fee structure is very popular for financial planners, and the primary method of collecting revenue by RIAs. The appeal of this structure is clear to the client by ensuring the advisor has incentive to grow the client’s assets in order to increase the firm’s own revenue. This model can be easily seen as a win for both clients and their advisors in periods of market stead growth with all-in investing. We know this model is not without its challenges, especially when faced with volatile markets and trepidation to fully dive into the market by clients.
The fees charged based on AUM have commonly covered all planning services provided to the client by the advisor. Often firms rely solely on this model and do not provide services to people seeking the assistance whose assets are not under management of the firm. As firms feel the squeeze financially using a pure AUM model, more are exploring increasing their revenues by charging fees for services provided outside of the asset management model and for specialty services like insurance, accounting or legal.
Financial-Planning.com shared a study conducted by RIA in a Box in a Febuary 26th article “How Advisors Get Paid Now.” This survey indicates there is a shift away from AUM fees as the sole source of revenue. More advisors are including hourly or fixed fees for client with few or no assets under management and providing specialty services.
“Nearly all (94%) of RIAs are getting paid as a percentage of assets under management, according to an inaugural survey of advisory firms around the country from RIA in a Box, a compliance and registration firm. The report found that 55% of surveyed advisors also charge their clients on an hourly basis, 43% charge fixed fees and 10% receive performance-based fees.”
After the AUM model’s rapid increase in popularly, it appears a more balanced revenue approach might be better for some RIAs. Even as RIAs increase their practice of providing services based on hourly rates or fixed engagement fees, it is unlikely that RIAs will abandon the AUM model, according to Michael Kitces July 2012 blog post “Why Annual Retainer Fees Won’t Overtake The AUM Model.”