Fixed and Hourly Fees

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Mar 10, 2010 1:21 pm

Can you charge a client fees from their retirement accounts.  Say they have 150k in a 401k, 50k in bank CDs, and 100k in a brokerage account.  For planning purposes, is the client allowed to ask their 401k provider to cut you a check for your services?

Mar 10, 2010 4:58 pm

[quote=Bureaucrat]

Can you charge a client fees from their retirement accounts.  Say they have 150k in a 401k, 50k in bank CDs, and 100k in a brokerage account.  For planning purposes, is the client allowed to ask their 401k provider to cut you a check for your services?

[/quote]

Noooo.  If you are an RIA, the brokerage account would be held at your custodian, and if you were wanting to charge the fee for everything it would all come out of that account.  If you are a planner only, (no custodian relationship) the clients would have to cut you a check.

Mar 11, 2010 10:04 am

What about being a separate account manager on a qualified account?  

Example: client works for large company and has a lot in his 401k plan that he would like to see managed.  The broker of record is never around, as he lives in another city.  

Can the client retain and pay the local RIA a fee to manage this account?  Does the situation change at all?  In other words, can the client pay from his 401k account at this point if the advice is specific to this account?

thanks

Mar 13, 2010 3:36 am

Or why dont you just get your clients permission to include the 401k assets in the total management, and take the 1.5% fee for their 401k from the ira account with you.

Mar 18, 2010 5:10 pm

You cannot withdraw funds from a 401K (without obvious taxes/penalties) to pay advisor fees unless the advisor is the broker of record on the plan and they have an agreement to do that within the 401K.

However, I know of a few firms that actually manage their clients private 401K accounts, but they pay separately (out of separate funds) for that service.  One that I can think of accepts credit cards to do this, but only charges a nominal fee (it's like $500 or less per year regardless of size).  It is part of their business model - I think they use it as a loss-leader to gather advisory assets and fill their pipeline.  It's actually not a bad model to get your pipeline filled.  Charge $250 and get a few hundred people on board.  When those 401K's "come due", where do you think those rollovers will go???

The interesting thing is that this firm actually gets the clients passwords and logs on and physically manages and rebalances their 401K accounts.  I suppose it's legal with the right LPOA.

Mar 20, 2010 5:32 pm

I think there is some confusion here......

YES!  An RIA client can pay the RIA fees from 401ks even if you are not the "broker" on the 401k plan.  The fees paid from the 401k can only be for advise related to that portion of the 401k.  So if it is a $2mm relationship and the AUM fee is 1% but the 401k is only $1mm then only $10,000 can be billed to the 401k.  I think you get the picture.  Can you do this with every 401k, no!  It depends on the 401k and what is written in to the Summary Plan Description.  The client can also write a check to the RIA for the advise on a 401k if the 401k doesn't allow outside advise ...this can be preferable to the client as they can potentially deduct the advisory fees from their taxes.

Managing 401ks is not a loss leader it's part of advising a client as a fiduciary.  If you don't take the 401k into account my personal opinion is that it would be a violation of the RIA's fiduciary duty to advise the client in their best interests.  If you think that managing a 401k is a loss leader then explain how the average breakaway broker with $25mm goes from the wirehouse to the RIA to managing 40mm? - because they start billing on the 401k as it is part of the fiduciary relationship.

An RIA can bill fees to the client's brokerage account.  The brokerage accounts are held at institutional firms like Schwab, TD and Fidelity (and others like Merrill Lynch Institutional).  The RIA is appointed as a limited power of attorney for trading and to charge fees to the account.  Like the 401k, an IRA can only pay fees associated with it's AUM.  A non-qualified account can be billed for the fee on the totality of the relationship.

 If the RIA chooses to be a planner only then there would be no need to bill based on AUM they would bill by the engagement (fixed or hourly).  I guess they could bill their engagement fee as a percentage of the assets but the reality of it is that is a far better business practice IMHO to bill based on the complexity of the financial plan being created.

Mar 20, 2010 7:08 pm

[quote=financialplanex]

I think there is some confusion here......

YES!  An RIA client can pay the RIA fees from 401ks even if you are not the "broker" on the 401k plan.  The fees paid from the 401k can only be for advise related to that portion of the 401k.  So if it is a $2mm relationship and the AUM fee is 1% but the 401k is only $1mm then only $10,000 can be billed to the 401k.  I think you get the picture.  Can you do this with every 401k, no!  It depends on the 401k and what is written in to the Summary Plan Description.  The client can also write a check to the RIA for the advise on a 401k if the 401k doesn't allow outside advise ...this can be preferable to the client as they can potentially deduct the advisory fees from their taxes.

Managing 401ks is not a loss leader it's part of advising a client as a fiduciary.  If you don't take the 401k into account my personal opinion is that it would be a violation of the RIA's fiduciary duty to advise the client in their best interests.  If you think that managing a 401k is a loss leader then explain how the average breakaway broker with $25mm goes from the wirehouse to the RIA to managing 40mm? - because they start billing on the 401k as it is part of the fiduciary relationship.

An RIA can bill fees to the client's brokerage account.  The brokerage accounts are held at institutional firms like Schwab, TD and Fidelity (and others like Merrill Lynch Institutional).  The RIA is appointed as a limited power of attorney for trading and to charge fees to the account.  Like the 401k, an IRA can only pay fees associated with it's AUM.  A non-qualified account can be billed for the fee on the totality of the relationship.

 If the RIA chooses to be a planner only then there would be no need to bill based on AUM they would bill by the engagement (fixed or hourly).  I guess they could bill their engagement fee as a percentage of the assets but the reality of it is that is a far better business practice IMHO to bill based on the complexity of the financial plan being created.

[/quote]

I've known this is possible in theory but have yet to run across one that allowed it.  Hopefully with the new legislation coming out of congress we will see this flexibility baked in to more and more plans.  I guess I need to start looking at the SPDs, I have gotten into a bad habit it seems.  Thanks for the info.  PS - I always look at the big picture, but seldom bill for this segment due to the constraints.

Mar 20, 2010 8:14 pm

This is not a "new" thing in anyway.  

Here's a start.  Any 401k through Fidelity that has "brokeragelink" as an option can have an RIA manage the account right through Fidelity's AdvisorChannel.com