Updated on: November 6, 2023

When shifting to a fee-based or fee-only financial planning model, one of the primary considerations is what fee structure to implement. Charging a fee for assets under management (AUM) has for decades been the most popular planning fee, but newer financial planning fees are emerging as potentially superior alternatives, making the decision of which type of fee to use more complex.

Understanding how each financial planning fee structure may be best deployed, as well as their potential downsides, is important for weighing the merits of each.

Moving away from Commissions-based Financial Planning and Beyond AUM Fees

Commissions were once the primary form of compensation in the financial services industry. A recent report from Cerulli¹, however, shows that in 2020 just 25 percent of the average advisor’s compensation came from commissions. By 2022, that number is expected to shrink to 18 percent.

The AUM fee, in the meantime, is gaining popularity. In 2020, 70 percent of an advisor’s compensation came from asset-based fees, and in 2022, Cerulli anticipates this number will climb to 74 percent.¹

While the AUM fee gains favor among those moving their business away from commissions-based planning, financial professionals are becoming more willing to explore alternative fees to either replace or complement AUM compensation. One of the primary motivators for this is the fact that 90 percent of U.S. households have less than $500,000 in investable assets, making it harder to serve them with an AUM fee model.¹

With 56 percent of investors willing to pay for advice¹, there’s a huge untapped market out there for financial planners—one that’s more accessible to those offering subscription, retainer, hourly, or some other combination of alternative fees for planning as a service.

The Pros and Cons of Six Common Financial Planning Fees

There is no single correct planning fee. There are benefits and drawbacks to each type of fee because there’s not one that’s best for every scenario. It’s all about what’s best for your clients and the future of your firm.

And while every firm is different, there are a few generally applicable pros and cons for each fee structure.

As mentioned, the AUM fee is currently the most popular. It’s set, and potentially tiered, based on the client’s level of assets. The average AUM fee for clients with $750,000 is 105 basis points (bps) with more than three-quarters of advisors charging between 100bps and 149bps.¹

1. AUM Fee for Financial Planning

Pros:

• Widely adopted by industry
• Older clients may be accustomed to paying based on assets
• Can avoid disruption by sticking with AUM fees

The primary benefits of the AUM fee is that older and wealthier clients may be accustomed to paying for advice based on their assets and would readily agree to this kind of arrangement. The AUM fee is widely used in the industry, allowing planners to benchmark their pricing and services more easily against competitors. Plus, those already using AUM or hybrid AUM fees can avoid service disruptions or lost clients by not making a change.

Cons:

• Only a small portion of the population can be served
• Value is poorly matched to price
• Major conflicts of interest for planning
• Increasingly harder to explain and justify

For all it’s popularity, the AUM fee has several downsides. Chief among them is the fact that it’s only profitable when serving a small segment of high-net-worth investors. The costs of investment selection, allocation, and rebalancing have declined dramatically with advances in automation. This makes it harder for planners to continue justifying a fee this high. It also means that the true value a financial professional delivers is through a financial plan that helps clients reach their most important goals in life, not the returns on their investment portfolio. Matching that value to the price being paid is rapidly growing in importance as savvier clients are learning more about how they’re paying, and expecting more in return at the same time. And just as important, AUM fees may incentivize financial professionals to prioritize aggregating and retaining as many assets as possible, instead of offering objective advice that may sometimes involve drawing down assets that would lower fees.

2. Subscription Fees for Financial Planning

In a subscription based financial planning model, financial planning services are charged regularly, typically on a monthly basis, for ongoing planning work. Subscriptions are typically updated on a yearly basis and feature a well-defined set of services, meetings, and other touchpoints.

Pros

• Proven successful and popular in a wide range of industries
• Familiar and accessible to younger, less wealthy prospective clients
• Predictable revenue streams

Subscription pricing for financial planning services has many upsides. The subscription model has been successfully deployed in numerous industries, making it a familiar and easily understood form of pricing for clients. Subscriptions may be most appealing to those 25- to 44-years old who have incomes from $50,000 to $100,000—a segment of the wealth management market that has been historically underserved by planners charging a fee on assets under management. Additionally, subscriptions offer highly predictable, reliable streams of revenue not tied to market performance or wallet share.

Cons

• Unpaid for the upfront work of planning
• Clients, and regulators, may expect a planning deliverable every month
• Clients may reevaluate the relationship every month

As with any fee structure, there are downsides to subscriptions. First and foremost, there’s a lot of upfront work that goes into onboarding clients, aggregating assets, and building the foundation of a long-term relationship. These efforts are not paid for in a subscription-only model. When clients are paying a fee every month, they may expect a tangible planning deliverable every month, when in reality the work of planning is not so consistent, and sometimes, such as in a market downturn, the best thing to do could be nothing. Regulators also want to prevent reverse churning and may hold financial professionals accountable for documenting all the planning work done to earn a monthly fee—though for those truly providing comprehensive planning, this shouldn’t be a problem.

3. Annual Retainer Fees for Financial Planning

An annual retainer fee is paid yearly, though some firms may choose a quarterly retainer, for access to a financial planner. Whereas a subscription model may have set deliverables, a retainer fee is more flexible, letting planners serve clients for a wide range of needs within the pre-defined scope of the retainer.

Pros

• Peace of mind for clients knowing one fee covers all their needs
• Simple, transparent, and non-disruptive form of pricing
• Predictable revenue streams

Financial professionals are increasingly exploring annual retainer fees for planning for several reasons. Primarily, clients can feel a great sense of ease knowing that once their fee is paid, everything they need from their planner will be covered under the retainer. They can rest easy knowing the financial professional is on their side any time they need guidance. In this way, getting the logistics of payment out of the way once a year, as well as the work of justifying the fee, minimizes any cost-related disruptions to planning. Like subscription pricing, it’s a simple, straightforward, and easy to understand fee that offers steady streams of revenue.

Cons

• High regulatory burden in some states
• Sticker shock for some clients
• May need to charge for services outside the scope of the retainer

A retainer fee that’s paid yearly may be easy for both client and financial professional, but it can also make the cost of financial planning appear higher to clients, potentially putting planners in a position to justify their pricing when bringing new clients on or when renewing retainers. Also, the peace of mind afforded to clients who pay a yearly retainer may be undercut by the fact that some services could fall out of scope, again putting the planner in a position to explain why they need to charge what they’re charging. It’s important to also note that some states, like Utah, for example, have strict standards around what constitutes a compliant retainer service in an effort to prevent reverse churning.

4. Hourly Fees for Financial Planning

Hourly fees are exactly that: a fee based on an hourly rate set by the financial professional and calculated by adding the number of planning hours spent on a given client. Hourly fees are the least common planning fee, with just 0.5 percent of an average advisor’s compensation coming from hourly fees, though that number is expected to grow marginally to 0.7 percent by 2022.

Pros:

• Simple and transparent fees
• Most clients are used to paying professional services by the hour

While hourly fees for planning may have the lowest adoption, they do have some benefits, primarily in their simplicity. It’s easy to see exactly what’s being delivered in exchange for what’s being paid. Other professional services firms, like law firms, have been billing by the hour for a long time, so many clients may be familiar with this pricing method and understand they’re paying for their planners time.

Cons:

• Clients don’t know how long planning should take
• Unforeseen complexities increase the fee
• Clients could be incentivized to minimize planning work or planning meetings
• Creates conflicts of interest

The hourly fee may work great in some circumstances, but there are notable drawbacks. Client’s won’t be familiar with the process of planning, so they won’t know if they’re being charged fairly or not, they’re at the discretion of the planner to decide what’s fair. There are inherent conflicts of interest here too. The financial professional could be incentivized to spend more time planning to collect higher fees, or they could be restricted in their ability to be proactive for the client in an effort to respect the client’s ability to pay. Oftentimes, hourly fees will be quoted up front, but unforeseen complexities could add significant time to the planning project, putting the planner in a position to explain why they have to charge more than agreed upon. In this way, from the client’s perspective, an hourly fee is somewhat unpredictable. It could also lead clients to not want to meet and discuss the detail necessary to create comprehensive plans in order to avoid any associated fees.

5. Flat Fees for Financial Planning

A flat fee for financial planning could take several forms: it could be a charge for a single, comprehensive financial plan; it could be for a single financial planning session, or series of sessions, where a financial professional and client sit down to cover as many topics as possible within a set timeframe; or it could be a one-time project to help a client with a major financial decision, such as buying a home or choosing pension payments.

Pros:

• Potentially the simplest type of planning fee
• Accessible to practically anyone who has important financial questions
• Easily scalable with the complexity of a plan

Flat fees do have several benefits. They’re easy to understand and oftentimes they’re targeted at individuals who don’t fit into an AUM model or even a subscription model of advice. In that way, they’re great for financial professionals who want to expand their reach. Flat fees can also easily be tiered to account for differing complexities of planning sessions, projects, or one-off plans.

Cons:

• Not applicable for all clients
• Planners could be incentivized to minimize planning time
• Flat fees don’t reflect the ongoing nature of planning

Flat fees will only be applicable to some clients, potentially those who aren’t even interested in paying for ongoing advice. It’s great to serve these individuals, but those who want and need ongoing financial planning will fit better into another fee structure. This is because financial plans can quickly become outdated and circumstances constantly change. To best serve clients, financial professionals should be advising as situations change and proactively involving the client in the process. The flat fee structure doesn’t leave room for this kind of work. It could also potentially incentivize planners to spend as little time on a plan in order to maximize profitability.

6. Blended Fees for Financial Planning

A blended fee structure in financial planning is comprised of a combination of any of the fee structures mentioned above. Many financial professionals using blended fees, for example, choose to charge an upfront flat fee for the creation of a comprehensive plan to account for all the initial work, then charge an ongoing subscription or retainer fee to cover continuous planning services. Many will also take this blended fee structure and add in a separate AUM fee to cover the costs of investment management.

Pros:

• Fair compensation for the upfront time investment of planning
• Helps build a long-term relationship
• Freedom to best deliver the value you’re charging for

Using a mixture of fee types allows financial professionals to most closely align their pricing with the value they’re delivering. This means fair compensation on the part of the financial professional, and greater transparency for the client in terms of what they’re paying for and why. Blended fees facilitate long-term relationships with clients by accounting for both the upfront and ongoing work of planning while catering to clients’ desire for more transparent and straightforward pricing. Importantly, a blended fee structure allows planners to separate financial planning and investment services, which opens the door to a whole new host of potential service offerings and relationships with clients.

Cons:

• Some states don’t allow blended fees
• Clients could view it as being charged multiple times for the same service
• Slightly more complicated

While there are many potential upsides to blended fees, there are potential downsides as well. First, some states won’t allow for blended fees in financial planning, so be sure to check your state regulations on fee structures. Another potential pitfall is that clients may see a blended fee as being charged several times for the same service. In their mind, they want one thing: their finances managed. Even though in reality there are many varied components and distinct services that this involves, clients may question multiple fees. And if they do question it, having multiple fee types is slightly more complicated for clients to wrap their heads around when compared to something as simple as a subscription or retainer fee.

Making the Switch to Fee-based Financial Planning

There is no single fee structure that will work best in all situations. Understanding some common financial planning fees and when they’re most applicable is a great first step in deciding to transition your firm to a fee-based or fee-only financial planning model.

To learn more about making the switch and wealth management fee comparisons, read our recent eBook Shifting Your Compensation Model.

Source:

1. The Cerulli Report, “U.S. Advisor Metrics 2020: Dimensions of Diversity,” Cerulli Associates, December, 2020.

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

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