Clients consider a wide range of factors when selecting a financial advisor. However, cost consistently ranks as the most crucial consideration. In a Magnify Money survey of over 1,500 Americans, 58% of respondents said fair fees are the most important quality they look for in an advisor, followed by location and having a track record of proven returns.
Financial advisors’ cost is closely tied to their pricing structure. Flat fees, monthly retainers, and product commissions are just a few models they can choose from. Each pricing model has pros and cons, and some support clients’ best interests more than others.
In this article, we’ll define the different types of fee-based pricing and explain why it’s become an increasingly popular choice for advisors and clients alike. After that, we’ll explore how to choose the best fee-based pricing model for your needs and goals.
What is a Fee-Based Financial Advisor?
When it comes to pricing, most financial advisors fall into one of two categories: fee-based or commission-based. Fee-based advisors charge fees for their advice and services, while commission-based advisors earn commissions by selling specific financial products.
Under the fee-based umbrella, there are several types of pricing models financial advisors can choose from. The most common types include:
- Flat fees – A flat fee is a fixed amount that advisors charge for one-time services, with no ongoing or recurring charges. For example, an advisor might charge $3,000 for a comprehensive financial plan, $1,500 for a basic retirement plan, or $2,000 for an initial estate plan. This pricing model works well for clients who only require one-time services, rather than ongoing support.
- Hourly fees – Some advisors charge hourly rates for consultations or project-based work. This model is ideal for clients who only need short-term, specialized advice. For instance, a client might pay an hourly fee for a one-time tax review or a retirement account rollover consultation. This pricing structure is the most flexible, but it can also lead to unexpected costs for clients if their advisor doesn’t manage their time effectively.
- Retainer – In a retainer model, clients pay an ongoing, recurring fee, which may be charged monthly, quarterly, or annually, to retain access to their advisor’s services. This model works well for clients who require ongoing guidance but don’t have large portfolios just yet.
- AUM-based model – While not “fee-based” in a traditional sense, many financial advisors charge clients a percentage of their assets under management for investment management services. Typically, annual AUM fees range from 0.5% to 1.5%, depending on the advisor’s level of expertise and the client’s asset size. This model is especially appealing to high-net-worth clients who often prefer to tie their advisors’ compensation directly to their portfolio’s performance.
- Hybrid model – A hybrid model combines flat fees, hourly fees, or retainer fees with a separate AUM charge. For instance, a client may pay a $1,000 flat fee for financial planning plus a 1% AUM fee for investment management. This pricing structure allows clients to separate these costs while aligning their advisor’s incentives with their portfolio growth.
Read More: Financial Advisor Fee Structures: Comparing Flat Fee and AUM
5 Benefits of Fee-Based Financial Advising For Clients
Now that you know how fee-based pricing works, you may be wondering what benefits it can provide to clients. Here are five advantages clients can look forward to when working with a fee-based advisor:
#1 Cost Transparency and Predictability
With fee-based pricing, clients have a clear understanding of what they owe upfront, whether it’s a flat fee, an hourly fee, a quarterly retainer, or an AUM charge. This transparency makes it easier for clients to incorporate their advisor’s fees into their monthly budgets and eliminates any surprise charges down the line.
Clients who work with fee-based advisors may also feel more comfortable reaching out with questions, knowing they won’t be nickel-and-dimed for every inquiry or service request.
For example, consider a client dealing with the financial aftermath of a divorce. During this challenging time, this client has many questions about their cash flow, asset allocation, and real estate holdings. Thanks to their advisor’s fee-based model, this client only has to pay a predictable flat fee each month to enjoy continuous guidance and support.
#2 Alignment of Interests
With a commission-based model, advisors have a clear incentive to push products that generate the highest commissions. Fee-based pricing removes this conflict of interest, allowing advisors to be compensated for the quality of their advice, rather than for the products they sell.
By allowing advisors to put their clients’ needs first, fee-based pricing is well-suited to those who want to serve as fiduciaries. Fiduciaries are legally required to act in their clients’ best interests, disclose any potential conflicts of interest, and ensure that their product recommendations align with their clients’ goals. Clients often prefer working with fiduciary advisors, as it enhances their trust in the financial planning and investment management process.
#3 Potential For Comprehensive Financial Planning
Financial advisors provide a diverse array of services, and the scope of what’s offered can vary greatly from one advisor to the next. For example, some advisors focus solely on financial planning and investment management, while others may also provide:
- Tax planning
- Retirement planning
- Estate planning
- Insurance planning
- College planning
- Cash flow management
- Debt management
- Budgeting support
Working with an advisor who offers a broad range of services can be a major advantage for clients. As their financial needs evolve, they won’t need to find a new financial advisor to handle each new challenge. Instead, their holistic, fee-based advisor can meet their needs under one roof.
#4 Attainability
Many Americans assume that working with a financial advisor is only for the wealthy. In fact, over 40% of survey respondents cited this as their reason for not seeking financial advice, while 25% assumed that they didn’t have enough assets to qualify.
While AUM-based advisors typically have minimum asset requirements of $250,000 or more, fee-based advisors – particularly those who employ flat-fee or hybrid pricing models – are often open to working with clients who have smaller portfolios. Thus, these advisors make high-quality financial advice more attainable for those with modest asset bases.
For example, consider a young entrepreneur who doesn’t have the $250,000+ required to work with an AUM-based advisor. By choosing a retainer-based advisor, this client can secure ongoing advice for a modest monthly fee.
#5 Affordability
Another common misconception about working with a financial advisor is the cost. Half of consumers believe it’s much more expensive than it actually is, estimating the average cost to be 5% to 15% of managed assets. In reality, financial advisors’ fees typically range from 0.5% to 1.25%. As a result, about one-third of respondents avoid seeking financial advice altogether.
Fee-based financial advising is often more affordable than commission-based advising because it removes the risk of hidden fees or unexpected charges. What’s more, fiduciary advisors can actively help their clients grow their wealth to the point where their services effectively pay for themselves.
4 Benefits of Fee-Based Pricing For Financial Advisors
While clients have a lot to gain from fee-based financial advising, so do advisors. Here are four advantages that advisors enjoy when they employ a fee-based pricing model.
#1 Revenue Stability
Financial advisors’ primary goal is to help their clients optimize their finances and build wealth. However, to run a sustainable business, they must also ensure their own financial stability.
With commission-based models, financial advisors’ income may fluctuate month to month according to their sales performance or market volatility. Fee-based models, on the other hand, ensure greater stability by allowing advisors to forecast their earnings for the entire month, quarter, or year.
Not only does this predictability provide greater peace of mind, but it also empowers advisors to grow their business by investing in new technology, team members, and marketing initiatives. A stable revenue model can also enhance financial advisors’ business valuation as they approach retirement, making their practice more attractive to potential buyers and supporting a smoother succession plan.
Read More: The Importance of Succession Planning
#2 Scalability
With commission-based models, advisors rely on selling financial products to generate income. This often places a cap on their scalability, as their income only grows when they increase their sales. In contrast, fee-based pricing allows advisors to scale more effectively by upselling clients as their financial needs evolve.
For example, consider the case of a young professional who only requires financial planning. Over time, with the help of their advisor’s expert guidance, this client grows their wealth to a point where they need dedicated investment management services, too.
At this stage, the advisor can seamlessly transition the client to a hybrid model, where they pay an annual AUM fee in addition to their original financial planning retainer. This timely upsell allows the advisor to continue serving their client’s expanding needs while increasing their revenue.
#3 Enhanced Client Trust
Another way that fee-based financial advising can support advisors’ growth is by increasing clients’ trust in their services. By acting as fiduciaries, advisors can reassure their clients that every decision is made with their best interests top of mind.
According to a Vanguard study, 94% of surveyed investors are likely to refer their advisor if they “highly trust” them. Thus, cultivating this level of trust can lead to a steady stream of high-quality referrals.
#4 Client Retention
Finally, fee-based pricing positions advisors as clients’ long-term partner, as opposed to a short-term salesperson. Over time, this dynamic can lead to deeper, longer-lasting relationships, making clients more loyal and less likely to shop around for a new advisor.
Fee-based financial advising often involves ongoing, regular communication between advisors and their clients, which naturally creates more opportunities for clients to introduce their advisors to their spouses, children, and grandchildren. This familiarity can foster a sense of trust across generations and strengthens the advisor’s role as a family’s go-to financial resource.
With the “great generational wealth transfer” underway, where Gen X and millennials are set to inherit over $70 trillion in the next two decades, building these intergenerational relationships is more crucial than ever for advisors’ long-term business growth and client retention.
Read More: How to Attract and Retain Clients as a Financial Advisor
How to Choose the Best Fee-Based Pricing Model
As we mentioned earlier, there are several types of fee-based pricing models. So, how can you select the best one?
Here’s a helpful guide to help you determine the most appropriate pricing model:
- Flat fees for one-time services – Some clients reach out to advisors for one-off services, such as requesting tax strategies for the upcoming tax season or establishing an estate plan. These projects don’t necessarily require year-round support. Thus, a flat fee can compensate advisors fairly while eliminating clients’ fears of hidden fees.
- Hourly rates for one-time consultations – Another short-term option is an hourly rate. This works well when clients need brief counseling on a specific issue. For example, an investor might seek help with rolling over a 401(k) from a previous employer. Since no ongoing services are required, an hourly rate ensures they only pay for the time spent on that particular need.
- Retainer models for younger clientele – Retainer-based pricing is a strategic choice for advisors who want to work with clients who are early in their financial journies or those with smaller portfolios. Since these clients often require ongoing guidance but may not yet have significant assets, a retainer allows them to access continuous support without the pressure of prohibitive AUM-based fees.
- Hybrid models for bundled services – Hybrid models work best for advisors who offer additional services on top of investment management, such as financial planning, retirement planning, or tax optimization. By combining a flat fee for planning services and an AUM-based fee for investment management, advisors can holistically serve their clients while offering flexible, portfolio-driven pricing.
Optimize Your Pricing Model With Alden Investment Group
In summary, pricing structures can have significant impacts on the client-advisor relationship. By selecting the right fee-based model, advisors can ensure that they’re appropriately compensated while fostering trust, loyalty, and long-term satisfaction with their clients.
Need expert guidance on refining your pricing model? If you’re a financial advisor, Alden Investment Group can help. As a trusted Registered Investment Advisor (RIA) and broker-dealer, we’re well-versed in helping advisors optimize their business models to support their goals.
Along with offering these insights, we can also match you with a host of helpful resources, from our robust Turnkey Asset Management Platform (TAMP), Alden COVE, to our strategic succession planning support.
Reach out to Alden Investment Group today to learn more.
Sources:
Magnify Money. Half of Consumers Think Financial Advisors Are More Expensive Than They Are, But Almost All Who Use One Say They’re Worth It.
https://www.magnifymoney.com/news/financial-advisors-cost-survey/
AdvisorHub. Financial Advisor Fee Structures: Comparing Flat Fee and AUM.
https://www.advisorhub.com/resources/financial-advisor-fee-structures-comparing-flat-fee-and-aum/#:~:text=What%20is%20an%20AUM%20Payment,would%20earn%20%2410%2C000%20that%20year.
National Association of Plan Advisors. Why Consumers Use and Don’t Use Financial Advisors.
https://www.napa-net.org/news/2021/3/why-consumers-useand-dont-usefinancial-advisors/#:~:text=Those%20Without%20an%20Advisor,they%20have%20enough%20invested%20assets.
Nerd Wallet. How Much Does a Financial Advisor Cost?
https://www.nerdwallet.com/article/investing/how-much-does-a-financial-advisor-cost
CNB Bank and Trust. Trust: A Financial Advisor’s Most Important Asset By Investopedia.
https://www.cnbil.com/Blog/Posts/97/Blog//Trust-A-Financial-Advisors-Most-Important-Asset-By-Investopedia/blog-post/#:~:text=Trust%20Multiplies&text=The%20same%20report%20found%20that,of%20trust%20in%20their%20advisors.
Market Watch. Gen X-ers and millennials are poised to inherit trillions in the coming years.
https://www.marketwatch.com/story/gen-x-ers-and-millennials-are-poised-to-inherit-trillions-in-the-coming-years-ee93f6be