Whether due to fears of the next bear market, a struggle to differentiate in an increasingly crowded AUM-fee landscape, or the pressure of competition from robo-advisors, a growing number of financial planners are talking about changing from the assets under management (AUM) model to adopting some form of (typically annual) retainer fees instead.
While the AUM model has challenges, though, from revenue volatility to potentially misaligned pricing for clients to non-trivial conflicts of interest, the ongoing rise of the AUM model suggests that it still has more benefits than drawbacks. And in fact, its biggest strength from the business model perspective – the ability to have revenue per client grow over time as the market grows – may be a key factor that allows it to continue to dominate the more-salient retainer fee alternative, which may struggle to keep pace with rising employee advisor costs given the industry’s demographic shortages.
Yet the reality is that the greatest potential for retainer fees may have nothing to do with competing head-to-head with the AUM business model, but instead to reach out to clients that the AUM model can’t serve in the first place – as many as perhaps 80% of all households, that simply don’t have available assets to manage (or sufficient assets to be managed in the first place). In fact, the untapped market potential for using retainer fees to expand the reach of financial planning is so large that, in the long run, while the AUM model may still survive, it could become a niche for high-net-worth clients, while most consumers access financial planning through various retainer or fee-for-service alternatives!