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Advisors’ Use of Fixed Planning Fees on the Rise

A fixed fee for financial planning can offset variability in asset-based fees in a down market and reinforce the value of financial planning for the client, according to a new Cerulli report.

Advisor adoption of financial planning services is growing, with nearly half of advisors’ clients, on average, receiving these services in 2017, up from about a third in 2013, according to a new report by Cerulli Associates. And along with that growth, advisors are altering their pricing. About 36 percent of advisors across channels charge a fixed fee for financial plans, the report found, and 62 percent of millennial advisors (those under 36 years old) charge such a fee.

And although these fees account for just 4 percent of advisors’ revenue, on average, advisors plan to increase their use of financial planning fees to 5 percent of revenue.

Asset-based fees are, of course, still the dominant fee structure, with 58 percent of advisors’ revenue generated from these fees. Cerulli found that the average AUM-based fee for clients with between $100,000 and $10 million in assets was between 64 to 130 basis points.

“AUM-based fees are ideal in bull markets, but can be less predictable in volatile markets,” the report said. “A key downside to AUM-based fees is that an advisor’s revenues shrink in down markets when they are asked to perform one of their toughest roles—coaching clients in down markets.”

Fixed fees for financial planning can help offset that variability. Such fees can also bring in more revenue from smaller accounts and lessen the profitability imbalance with larger accounts.

Charging clients a separate fee for financial planning also reinforces the importance of that plan, Cerulli says.

“By assessing a fee, the client believes there is more value in the service and they have more ‘skin in the game,’ which motivates them to engage more proactively in the planning process,” the report said.

That said, there are limitations to using a fixed fee. 

“Any changes need to be reviewed with clients, drawing attention to the increase, unlike asset-based fees that automatically reset upward or downward based on performance.”

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