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).
These issues are part of why many fee-only advisors end up incorporating AUM into their pricing, as it can be a useful proxy for client complexity and help the advisor ensure that their revenue increases over time as their experience grows. If advisors want to avoid this and remain completely flat-fee, doing so may require adjusting fees to reflect client complexity – especially as the value of their expertise (and time!) grows and client needs shift.
Ultimately, flat-fee advice does not need to mean lower-fee advice, but advisory firms must be thoughtful about implementing mechanisms for revenue growth within their own practices. As a starting point, advisors can ensure that they set consistent business practices about how frequently price increases take effect, and how those adjustments are calculated. This is especially important in years when the advisor implements new service offerings, but also included in this value is their growing experience and domain expertise. In short, advisors who accurately understand the true cost and value of their work, price to reflect client complexity, periodically raise their fees, and protect against uncompensated scope creep can build a flat-fee practice that is both financially sustainable and aligned with delivering valuable advice to the clients they are best equipped to serve!
