Did You Deserve the Pay Cut You Just Took?
Now the shoe is on the other foot. For years, advisors who use a percentage-of-AUM fee schedule have done well as clients paid more and more, in dollar terms, in generally rising markets. But recent market declines have taken a sudden and dramatic bite out of advisor revenues. Client portfolios may have shrunk, but at least they are paying less in fees.
For advisors, the sting will be felt with the April quarterly billing cycle and probably beyond. Planned expenditures may be delayed. Layoffs may be necessary. Succession plans and payouts to departed partners may be negatively impacted. Certainly, paychecks will be smaller.
These disruptions are all the result of advisors basing their firm’s revenues on a variable that is totally beyond their control. Did they deserve a pay cut because markets declined in the face of an unforeseeable pandemic? Do they earn the raises they get in rising markets?
Advisors have not had much incentive to examine the logic of AUM-based fees because in a rising market such fees clearly work to their advantage. Now advisors are working harder than ever to help their clients through the coronavirus-driven crisis but are paid less for their efforts.
If history repeats itself, which it is highly likely to do, the markets eventually will regain their historically upward trend and advisors will once again benefit from AUM-based fees. Their raises will be reinstated. But the lack of logic underlying AUM-based fees will remain, as will the risk to the stability of their businesses caused by unpredictable market gyrations.
A Possible Solution
Our firm, First Ascent Asset Management, was the first TAMP to provide outsourced portfolio management services to advisors on a flat-fee basis. We work with advisors who, themselves, charge flat fees as well as advisors who charge based on a percentage of AUM.
The flat fee model appealed to us for two reasons. First, we thought our target audience would like it. Flat fees embody a logic, fairness and transparency that we believed would appeal to advisors and their clients. In addition, flat fees set us apart. No other TAMP offered them. A pricing model that would attract and appeal to our target audience seemed like sound business.
Equally important were the benefits of building our business on a sound foundation. We don’t have control over the direction of the markets or the size of our clients’ accounts, so it makes no sense to have our revenue vary based on those factors. Nor do we work harder for our larger clients than for our smaller ones, so there is no reason larger clients should pay more.
The net result is our revenues have increased through the coronavirus crisis as we have continued to add new clients during this period. We are working harder than ever as we manage portfolios through this crisis and communicate with and support the advisors who depend on us. Yet we have been able to continue to execute our long-term growth strategy without disruption and have not had our plans for the future ransacked by random events.
Before you reject the possibility of implementing flat fees at your firm, consider this. The flat fee business model need not be an all-or-nothing proposition.
We don’t charge flat fees on every account. We charge an AUM-based fee for small accounts—our $500 annual-per-account fee doesn’t kick in until an account reaches $100,000. We reserve the right to negotiate fees for accounts over $2 million due to the potential complexities and liabilities that can be associated with such accounts. And some of our clients simply prefer an AUM-based fee. We are glad to accommodate their requests.
We didn’t cause this bear market and we won’t try to take credit for the next bull market either. We work hard for our clients no matter what winds prevail, and we want to be paid a fair and reasonable fee for our services.
There’s no reason your fortunes should be entirely dependent on events you can neither control, nor predict. Diversifying your pricing model to include flat fees may stabilize your revenue stream and link fees more closely to work performed and value added.
Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based TAMP that provides investment management services to financial advisors and their clients. He is an ambassador for the Institute for the Fiduciary Standard and a 40-plus-year veteran of the financial services industry. He can be reached at [email protected]