Even though it’s too early to have any hard data, I’ve been hearing troubling reports from advisors I know and in some online chat rooms about advisors who had converted to all-retainer compensation. Contrary to what you might expect, the word I’m hearing is that many are struggling in this market downturn.
As I understand it, the problem is client perception: As portfolios shrank—as much as 50%—the retainer fees to the advisors obviously didn’t. That meant not only did advisors not financially share their clients’ pain, as a percentage of assets under management, their compensation actually went up.
I know, I know, their comp didn’t really go up, but apparently the mere appearance of an increase was enough to set some clients off.
In fact, the way I’m hearing it, more than a few retainer-paying clients were troubled enough to change advisors, which of course is exactly the opposite reaction most advisors were hoping for in a down market.
We’re all constantly on the lookout for better ways to structure compensation from clients. And after the dot.com crash, there was a movement within the fee-only advisory community to charge a flat retainer—which had the benefit of helping clients to appreciate the myriad other services beyond investment management, and, of course, keeping revenues flat in down markets.
Now we’re beginning to see how these flat retainers play out in the real world, and early indications are not promising. It seems that even though asset-based fees have their drawbacks—such as declining revenue during bear markets—the shared identity of interest that fees create between clients and advisors should not be overlooked. Clients are never happy when their portfolios lose some value, but apparently it’s much easier to take a decline when they see their advisor sharing in the same economic fate.
For many years now I’ve been a fan of combining flat retainers with fees on AUM, typically about a 50/50 mix. That way, advisors’ revenues are entirely at the mercy of the markets, but they still have enough skin in the game that clients pay noticeably lower fees when their portfolios are down. So far, my clients who charge this way haven’t lost any clients from this down market, and are in a better position to grow when things start to turn around.
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Angie,
Interesting blog. Do you know if anyone is doing more extensive research on your perception? I could easily see some clients feeling that the advisor is not sharing in the pain. I wonder if that is the most common reaction of clients.
One take-away from this article for me is the importance of talking about your fees with clients on a regular basis. If you have had four annual conversations with your clients about how their portfolio has gone up and your fee has stayed the same, I would expect fewer of the clients to complain when their portfolio goes down, the advisor is doing more work and the fee stays the same.
John
Angie,
I’d be interested in hearing more about the split retainer/AUM fee structure too. I’ve been contemplating doing this for some time, but haven’t found a lot of research on similar fee structures. Any suggestions on where I could find this data would be a tremendous help.
Thanks,
Shaun
Interesting article. I believe Ms. Herber missed a typo that materially changes the meaning of a statement in her last paragraph. The sentence that reads: “That way, advisors’ revenues are entirely at the mercy of the markets, but they still have enough skin in the game that clients pay noticeably lower fees when their portfolios are down.” I believe “are entirely” should read “are not”. Otherwise, the statement is inconsistent with the thesis of her article.
How is the AUM structured ‘independently’ from the portfolio managed? Is it calculated quarterly or is there a trend line allowing the client to observe when the amount was gathered and reported. In any reporting, similar to back dating of stock options it becomes an issue. One date for each reporting period should be consistently used. The 50/50 arbitrary or would it be 30/70 so more skin is in the game?
Hi Angela,
I have been using retainers very successfully for many years. I believe retainers for financial planning clients versus primary investment management clients are the professional way to go for the basic reason that our value proposition has really nothing to do what the market does on the short term. It sends the wrong message that might make your clients comfortable but in reality is a major distortation. The distoration is all the money they overpaid advisors who never realized the appreciation in clients portfiolios when the markets where overvalued ! Once clients understand this distortation I think fair and appropriate retainers based on longterm assets, goals and complexity is what would make what we do more of a profession. Retainers are about matching our true value propositon to the compensation . Unfortuantely for most client too many advisors are really asset gathers in financial planninng clothing. As long as there clients that think that their advisor is alignment with them because they charge AUM fees this myth will persist mainly to the benefit of the AUM advisor- which seems to be real concern in your article. Would be interested in your reply. Thanks
I too have contemplated incorporating a retainer in my currently AUM fee. It seems logical to assign the retainer portion to financial planning other than managing investments, and then of course the AUM would be assigned to investment management.
Although I consider my financial planning services (outside of investments) to be a real value, I am afraid to assign a quarterly value to them. My clients definitely like the fact that I have “skin in the game” with their assets, but at the same time I don’t feel they value my planning skills as much as they should. And therein lies the question: Do the fail to assign a value to these skills because I do?