Over the decades, the work that financial advisors do has changed considerably – from product sales to investment management to more ‘holistic’ financial advice and behavioral coaching. As the advisor’s offerings have shifted, so too have their fee models: product sales have evolved towards an assets under management (AUM) model. Some of today’s advisors, facing a plethora of fee options, have opted to leave the AUM model behind – marking the rise of fee-only financial advisors.
In this article, Sydney Squires, Senior Financial Planning Nerd, discusses the challenges – and opportunities – of various fee-only models, and what advisors who are looking to scale these models can do. “Fee-only” can comprise many different things: advisors who bundle AUM fees to include financial planning and investment management; flat-fee advisors who charge a combination of retainer, hourly, and project-based fees for their work; and advice-only advisors who do no investment management whatsoever. Flat-fee, subscription, hourly, and project-based models offer an alternative by more directly connecting what clients pay with the advice they receive. For that reason, flat-fee models can be particularly well-suited to clients with more investable assets, who may be more sensitive to AUM fees overall.
At the same time, the fundamental challenge is that relative to AUM-model advisors, flat-fee advisors often do a comparable amount of work – while generating substantially less revenue per client. Hourly pricing illustrates the gap particularly well: advisors charge an average of approximately $300 per hour, yet spend nearly 2 hours on unbillable activities for every billed hour. Meanwhile, an advisor who charges around 1% and spends roughly 21 hours annually servicing a $1 million AUM client effectively earns about $500 per hour. Accordingly, the viability of a flat-fee model depends less on whether advisors can charge flat fees, and more on whether those fees are priced appropriately. After all, a flat fee must not only cover client meetings and plan preparation, but also prospecting, marketing, compliance, administration, implementation support, and other unbillable work. Tracking time – even for a month – can reveal how much work actually goes into servicing each client (especially new clients).
