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How to Charge for Fee-for-Service Financial Planning đź’µ

July 07, 2022 By AdvicePay

The financial services industry is constantly evolving, and one of the evolutions underway right now is the rapid growth of the fee-for-service financial planning business model. For more than 80 years, financial professionals have been charging clients for investment and wealth advice under the Investment Advisers Act of 1940, but the methods of how fees are calculated and collected for those services are expanding.

Experienced advisors are familiar with charging fees based on a percentage of client assets under management, but many are uncertain how to appropriately charge fees for financial planning services when clients do not want to pay or are logistically unable to pay, using the assets in their investment accounts. Ready to adapt to industry changes, financial professionals are implementing alternative fee calculation and billing methods to support fee-for-service financial planning engagements as a compliment, or even an alternative, to billing based on assets under management (AUM).

Here are several ways advisors have adopted the fee-for-service business model in their financial planning and wealth management businesses.

How to Charge for Fee-For-Service Engagements

There are three leading models emerging in how advisors charge for fee-for-service financial planning engagements. The first model is the introduction of a new service line for clients who do not have investable assets to meet traditional AUM minimums established by firms, or the clients’ investable assets are not suitable to be transferred to the firm’s institutional custodian (e.g. assets are held in active employer-sponsored retirement accounts or allocated to real estate and/or private placement investments).

Offering a fee-for-service model expands access to the advisory firm’s financial planning services by removing the minimum asset requirement firms often enforce. This model is particularly appealing to young professionals, including lawyers and physicians, as they generally have deferred long-term savings activity to support tuition and household necessities during their education and training, but recently experienced a significant increase in income as they entered the workforce as fully credentialed professionals.

AUM Fee Offset

The second emerging model is the establishment of a minimum financial planning fee coupled with an offset to AUM fees. Under this model, advisory firms establish a minimum financial planning fee applicable to all household relationships, no matter how much in assets the household owns. In conjunction with the minimum planning fee, the firm charges the traditional AUM fee structure, which is typically 1% of AUM, with fee percentage decreases as total household assets increase.

For example, a firm may select a minimum annual fee of $4,000 for comprehensive financial planning services. Any client household with assets below $400,000 (of which a 1% annual fee is $4,000) pays the minimum fee under the fee-for-service billing model. When a client’s household assets exceed $400,000, they transition to the AUM billing model, where a percentage of their account balance is periodically deducted to pay for the services received.

Fee Repositioning

The third emerging model is one that can be considered under fee repositioning. In a fee repositioning model, firms establish a higher minimum fee for fee-for-service financial planning services but reduce the annual percentage deducted from client assets under management for investment management services.

An example of fee repositioning would be a firm that establishes a minimum financial planning fee of $8,000, payable under a fee-for-service model, and then charges a separate annual AUM fee of 65 basis points on each household’s assets under management. This AUM fee structure places the firm in a more favorable position for asset management services relative to the average AUM fees charged across the industry, which tend to be around 95 to 100 basis points. However, the firm repositions its value to clients by decoupling financial planning services from asset-based billing, and instead charges a fixed, recurring annual fee that is clear and transparent to clients.

Identify Provided Services

No matter which fee-for-service model is implemented by a firm, advisors need to clearly identify and communicate services rendered to clients. Internally, the firm can generate a library of all services available to clients and the fees associated with each item. During the proposal process, advisors can assess the specific needs of each client’s household, select the appropriate services most beneficial to the client, and then add up the associated fees to arrive at a total fee-for-service engagement amount.

For some examples of popular financial planning services to offer clients, read our post titled SERVICES YOU CAN PROVIDE UNDER THE FEE-FOR-SERVICE MODEL

In addition to individually matching services to client needs, firms can establish tiered service offerings that match a bundle of services to the various life stages most clients encounter through their financial planning journey. Details of how to structure tiered service offerings are found in our post titled USING TIERED SERVICE OFFERINGS FOR FEE-FOR-SERVICE FINANCIAL PLANNING

What Fees to Charge

One drawback to identifying a fee for each discrete service offered by an advisory firm is that it can be tedious to sort through dozens of potential service offerings and add up all of the associated fees. As an alternative, some firms establish fee templates or calculators to automatically generate a total fee amount based on the inputs specific to the client household.

Some firms implement a fee calculator that uses a combination of factors based on the household’s annual income and net worth. Others use a calculator that contains entries for a variety of household financial characteristics, including income, net worth, closely-held business interests, real estate holdings, private investments, collectibles, and more. And as mentioned above, other firms choose to establish fees based on common tiers of services bundled to match client life stages. 

One of the most popular features of AdvicePay is the built-in fee calculators, allowing advisors to select an appropriate fee structure for each client’s financial planning engagement, enter the required details about the client’s household and/or desired services, and AdvicePay outputs the total fee based on the parameters of the calculator. Follow this link to read our blog post describing the built-in fee calculators in more detail.

Finally, if you’re seeking additional resources on what fees your firm should charge for its fee-for-service financial planning engagements, download our free guide called How to Price Fee-For-Service Financial Planning.

How to Implement Fee-For-Service Engagements

Before proceeding with any change to fee structures, financial professionals must first update the required disclosure documents based on the firm’s registration status with FINRA, the SEC, or state securities regulators. With updated disclosure documents in place, advisors can consider the following fee-for-service implementation strategies to introduce such engagements to clients. 

Day-Forward Approach

The first implementation strategy for fee-for-service business models is the day-forward approach. In the day-forward approach, all new clients that engage the firm for financial planning services are charged under the fee-for-service model. Existing clients remain under the existing fee structure until they are engaged to transition to the fee-for-service model or they terminate their relationship with the firm. 

Firm-Wide Approach

The second implementation strategy is the firm-wide conversion. In this strategy, all households with active planning engagements are notified of the firm’s plans to convert to a new fee model. Clients should receive notification well in advance of the planned conversion, along with details of fees under their current engagement and an illustration of their fees under the proposed conversion. Clients then have the opportunity to agree to the new fee structure, or choose to terminate their engagement with the firm should they decide the proposed fee structure would not be a good fit. Clients who agree to the new fee structure are then automatically converted on the date indicated during the notification process. Depending on the number of households served by the firm, a firm-wide conversation may require a significant level of effort to implement.

Annual Review Conversion

Finally, another implementation strategy to consider is the annual review conversion process. Many firms follow an annual review cycle when scheduling client meetings, so as each household participates in its annual meeting, firms can introduce the proposed fee-for-service model during the meeting agenda along with a timeline for implementation. Like the firm-wide conversion, all clients are intended to participate in the fee-for-service model, but in this strategy, clients are not transitioned on the same day. Instead, the fee-for-service model is rolled out gradually, which reduces the burden of transitioning a large number of clients simultaneously, but it does stretch out the transition timeline which may require additional attention to detail in which fee structure a client participates and when that household is scheduled to transition to the fee-for-service model.

The Time is Now

In this post, we’ve highlighted three emerging fee-for-service business models firms are adopting, provided ideas on aligning services with fixed fees or fee bundles, discussed various ways fees can be calculated, and proposed three implementation strategies to introduce fee-for-service engagements to clients. As the financial services industry continues to evolve, financial professionals want to ensure that their business keeps pace with industry changes, including the growth of fee-for-service engagements. It’s clear that the industry is rapidly embracing this new business model, and the strategies outlined above provide a guide for any firm seeking to introduce fee-for-service planning engagements now and in the immediate future.

If you’re ready to move forward with a fee-for-service business model, use the link below to sign up for a free trial of AdvicePay and customize your settings to support your implementation strategy.

Ready to start charging for your financial advice? 

If you’re not yet using AdvicePay to efficiently and securely manage your fee-for-service engagements, sign up for a free trial using the link below!


Posted by AdvicePay

Topics: Compliance, Retainer Model, Practice Management, User Experience, Fee-For-Service, Enterprise