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Also available as podcast (Episode #126)
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What Type Of Fees Can I Charge My Clients In The RIA Model?
TL;DR – Asset Under Management (AUM) fees remain by far the most prevalent fee method used. Albeit the RIA model provides additional flexibility with how AUM fees can be implemented. Other fee types gaining popularity include flat, subscription, hourly, and/or a combination of all of the above. With any fee approach, there are regulatory, disclosure, and logistical considerations to be aware of.
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Full Transcript:
What type of fees can I charge my clients in the RIA model? That is today’s question on the Transition To RIA question and answer series. It is episode #126.
Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the model.
Again, TransitionToRIA.com.
I’ll apologize in advance, unfortunately like my last episode, which I recorded not too long ago, I’m still battling a bit of a cold. So if I need to take a quick water break along the way, I appreciate the patience.
Today’s episode is about how if you were to transition into the RIA model, what kind of fees could you charge your client?
Where that comes up, you might think… “I’m just going to keep doing (the fees you charge) what I’m doing now.” And you might very well do that. But one of the benefits that I talk a lot about in episodes is, depending on where you are now, the RIA model could provide you a lot more flexibility with how you can run the practice, the types of services you can provide for your clients, what your value proposition is, and likewise, how you charge them for those services.
So however you might charge fees now, might be due to the constraints of whatever firm you’re at where they tell you this is the only option or this is how it must be structured.
You might like that option and you might want to continue as-is in your new path (with that option) and that’s fine. But I wanted to talk about some of different ways that RIAs charge for fees to get you thinking about if you were to make the move maybe you want to incorporate some of these into your practice as well.
As I talk about often, there are multiple different pathways into the model. You can start an RIA, you can join an RIA, there’s a flavor in the middle. For simplicity on this episode, we’re going to talk about this as if you were starting an RIA, because ultimately that is where the most flexibility is on how you could do all these things.
That’s not to say that joining an RIA, for instance, won’t allow you to do them as well, but that’s going to be case by case based on whatever the service offering is of that RIA platform that you might join.
So for simplicity, again, I’m going to explain this as if you were starting your own RIA.
AUM fees
By far, no surprise, the number one way that fees are charged in the RIA model is the traditional AUM fee. Which is if you have fee-based business now, that’s likely what you’re doing now. That is by far the primary way that fees are charged in the RIA industry.
There are surveys that come out usually every year, different industry groups or whatnot do surveys, that show RIAs increasingly using a combination of fees. The AUM fee is the core approach, but they might also have other fee options available as well. But by far, AUM fee is number one.
Even if you aspire to continue using AUM fees, you might gain more flexibility with how you utilize it.
For instance, if you’re at a wirehouse firm, they likely dictate to you the fee structure you must use with clients. You might be able to discount the fee, but they have decided what the overall fee tiers are.
Perhaps from an account value of $0 to $500,000 is one thing, from $500,000 to $1,000,000 is another, and you must go along with that. You might be able to reduce it down, but maybe you don’t have any control over what those tier levels are.
With your own RIA, you set the tiers. If you want to charge 1% to every client of any size, you can do that. That’s probably not where you would end up, but if you wanted to do that, you could.
Or if you wanted to have break points at different levels than your current firm, again, you have the flexibility to set that.
You also have the flexibility to set the frequency of the fees. No surprise, quarterly remains the most prevalent model, because traditionally it’s used at a lot of firms that advisors are transitioning from, and advisors say, I’m just going to continue to carry that on. And so you have the option to do that quarterly.
However, there are RIAs who now bill on, for example, a monthly basis. Which you’ve maybe never had that option before.
Main takeaway, even if you want to duplicate your current AUM fee approach, you’ll likely have more flexibility if you want it.
Flat fees
Moving on, another fee approach that is gaining usage are flat fees.
There are several ways you can do a flat fee. It might be for a one-time service for a client. Someone comes in, whatever their circumstances are, you’re going to provide them certain value and advice, and maybe you charge them a flat $10,000. And that’s the extent of the relationship. You can do that, that is available to do.
Another approach is where instead of using an AUM fee, the advisor charges a flat ongoing fee per year. They perhaps provide financial planning, asset management, whatever. But it is a flat fee per year for the services.
The advisor and client agree on the fee, and perhaps also agree to revisit the fee amount every, for example, three years. Based on the client’s circumstances three years from now, the fee might be increased/decreased.
I know of an RIA having a lot of success with this. They charge a flat fee that starts at around $25,000 a year. They say… “Here’s everything we do for you throughout the year. Here’s how we price it.”
It usually starts at $25,000 and they have larger clients who have higher fee amounts.
But whether the market goes up, market goes down, the client adds funds to the account, they take funds out of the account, the fee stays the same.
And every few years the fee is reevaluated to determine if it’s still the right fee level.
Subscription fees
Next, you see this approach catching on particularly with RIAs that have a younger clientele is the so-called subscription model.
This is the Netflix effect. We live in a world where, for better or worse, we’re becoming attuned to reoccurring subscription fees for services. Whether it’s a gym membership, Netflix, whatever the case is.
There are RIAs whose business model is to say to clients… “Here’s everything we do for you throughout the year. And for that, we charge you $X per month on a reoccurring basis.”
Where this can be particularly helpful is if you have younger clients that need your services and advice, but who don’t yet have enough meaningful assets where an AUM fee works, perhaps some sort of subscription fee could work instead.
Now, you must provide value to justify the ongoing fee, And at the same time, the fee needs to be big enough to make it worth your while to add it your service mix. But a subscription fee approach is an option to consider as well.
Hourly fees
Closely related, you can also charge fees on an hourly basis.
You say to the client… “I’m here to help whenever you need it. Here’s the hourly rate and here’s how we bill it.”
Some advisors feel strongly about the merits of such an approach, others disagree with it. But it’s an option you could implement if desired.
Combination of fee approaches
Many RIAs are using a combination of fee approaches. They might be predominantly AUM, but due to different client circumstances, they might also use, for example, flat fees at times.
An example could be where a client has a (non-client) family member that has passed away. There’s an estate issue and there’s work that needs to be done on the estate for that other family member.
You might elect to help them figure it all out, but it’s beyond the scope of the AUM fee you’re charging your existing client. So perhaps you charge a flat $5,000 for the work involved.
I’ve also seen RIAs that charge a flat fee for the financial planning component of their offering, and a separate AUM fee for the asset management part.
For the financial planning they might charge, for example, a flat $10,000 a year. And then if the client wants you to implement the asset management part of it, you charge a separate AUM fee for that part.
So you can use a combination approach as well if you’d like. This is where you can start to get creative when you have this flexibility.
Using a fee to establish a minimum client size
Next, some advisors feel bad about implementing a minimum client size, typically expressed in investable assets. Perhaps $500,000 minimum.
One way you can try to make that a little more accommodating is as opposed to a minimum client size is have a minimum fee.
You say to the client… “Here is everything I do for you. If you would like to engage me for my services, I charge an AUM fee of (for example) 1%. But the minimum that fee needs to come to each year is (for example) $5,000.”
Depending on their account size, that calculation might be the equivalent of more than a 1% AUM fee. But they have the choice to still utilize your services if they desire, and you’re still able to be compensated as needed.
That’s a way to get around the minimum client size, if desired.
Final thoughts
I’ll leave you with three final thoughts.
While there’s a lot of flexibility with how to do this, it’s not an entire free-for-all. There are some guardrails.
First, from a regulatory standpoint, just because there’s more flexibility to do something doesn’t mean the regulators will look fondly on it.
As an example, AUM fees have been around for decades, at give or take ~1%. Maybe that goes down as you get larger clients, or if you’re providing a lot of value, it might be more than 1%.
There’s no regulatory rule that says you can’t charge more than X%, as if it’s a line in the sand. However, it is commonly understood that regulators will take an issue if you are too far out of the typical range.
For instance, if you tried charging your clients a 5% AUM fee, that is so far out of the norm, you’re going to have a very hard time justifying that to the regulators when they audit your RIA (either SEC or state.) They’re likely going to take issue with it.
There are guardrails. You can’t just charge whatever you want. You must be able to justify it and it must be reasonable with the marketplace.
Next, the second sort of guardrail, and this one’s easily manageable, you must disclose your pricing. That’s in the RIA’s ADV. You work with the compliance consulting firm you’ve hired to help you with the ADV. I’ve done episodes on that.
No matter what your fee schedule is, whether there’s more than one option, a combinations of options, if there’s minimum fees, etc. it all must be properly disclosed in the ADV.
It’s not a big issue. Again, the compliance consulting firm will help you with that. But it does need to be in the ADV.
And keep in mind, what is in the ADV (for fees) is essentially the high watermark.
If you pick some random RIA and pull their ADV – which is public information, you can find it online – if you look at their AUM fee schedule you might wonder how they getting away with charging X% at that asset size or that client size?
Well, keep in mind, what’s in the ADV is the high watermark. You’re saying as the RIA, this is the most we will charge, perhaps at a certain tier of the AUM fee schedule.
Typically though, if you look below the schedule, there is a sentence or two talking about how the RIA reserves the right to discount fees.
Just because you see a fee, doesn’t mean that’s what they’re typically charging their clients. There might be some clients who pay it, others who are discounted, etc.
This comes with a caveat though. You must be able to justify why you are discounting one client and not discounting another.
There could be reasons for that. One client’s situation might be significantly more complicated or sophisticated than another client’s, and so with the other client maybe a discount works for them and it doesn’t for the more complicated client.
You must be able to justify it, and again, it must be disclosed.
The final thought, no matter what creativity you come up with, no matter if you disclose it, no matter if the client is okay with it, you still must logistically be able to bill it.
This is a common conversation I have with clients. You typically rely on technology to do the fee billing for you. There are some very robust technology tools available.
But as an example, I am not aware of a billing solution that could do an AUM fee on a weekly basis, just to give you an extreme example. Now, I don’t know of any RIAs or advisors that want to do it on a weekly basis. Quarterly, or monthly are the more common arrangements.
But as an extreme example, if you want to do billing on a weekly basis I don’t know of technology that’s been built for that, because there’s very little (if any) demand for that.
The main point is just because you come up with some sort of fee schedule, and even if you disclose it, even if your clients are okay with it, you still need a way to logistically charge it to the client.
So this has been a couple things that hopefully gets you thinking about… “If I were to make a transition, and I had more flexibility, is there something I would change about how I charge my clients?”
Maybe there is, maybe there isn’t. For better or worse, because of how your current firm requires you to do it, that’s working for you, that’s working for your clients, and you don’t want to change it. That’s fine. You generally should be able to carry that over as-is.
But you likely will always have more flexibility to implement some of the things I’ve been talking about here, if you desire to do so.
With that, as I said at the top, my name is Brad Wales with Transition To RIA. This is the type of thing I help advisors with is understand all the nuances of the RIA model and what it might look like for their practice. I’m happy to have that conversation with you as well.
First things first, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you better understand the model.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TranstitionToRIA.com.
And with that, I hope you found value on today’s episode, and I’ll see you on the next one.
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