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Wealth Management
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In the last issue of the
CBR
, Brian Lampron explored different
approaches to pricing your advisory business—specifically,
via asset-based fees (“A Fresh Look at Pricing Your Advisory
Business: Blended Vs. Breakpoint Schedules,” Jan/Feb
2014, p. 23). It has been a generally accepted truism in
our industry that AUM fees are a best practice, not only
for their ability to align client and advisor interest, but
also for their leverage and theoretically unlimited upside.
Yet there are potentially adverse consequences to AUM
fees. The most obvious is their correlation to the market
and resulting revenue variability, which can have a material
impact on your business, as evidenced by the meltdown in
2008–2009. Another less obvious, but no less deleterious,
effect of a pure AUM schedule is the tendency to bundle
services beyond asset management under the AUM fee.
I sometimes refer to this bundling of services as “1% and
everything else.” To illustrate the potential risks of this
approach, let me share one advisor’s unfortunate tale.
Faith
What follows is the abridged version of a long and winding
story shared with me by a reformed “1% and everything
else” advisor. This advisor, let’s call her Faith, had started
working with a small business owner a few years prior. Like
she did with all of her clients, Faith positioned herself as
the client’s CFO and made it clear to the client that she
wanted to be the first call for all matters financial. For the
privilege of having a personal CFO, the client would pay
Faith an AUM-based fee.
In the case of this particular client, the amount was modest,
as the vast majority of the client’s net worth was tied up in
his business. Faith knew this but figured that if she could
prove herself over the next couple of years, she would earn
the opportunity to manage the proceeds when the client
ultimately sold his share of the business. As hoped, the
client eventually came to Faith and asked for her guidance
in facilitating the sale of the business. Over the next six
months, Faith spent considerable time in meetings with
the other principals, attorneys, and accountants, all in an
effort to optimize the proceeds for her client.
As you may have guessed, this tale does not have a happy
ending. The client did sell his business and netted mid-seven
figures in the process—but Faith did not end up managing
the proceeds. What went wrong? Faith’s pricing model had
effectively given this client a blank check upon which he
could draw unlimited financial consulting support at no
additional cost, and then he took his business elsewhere.
Hope
The preceding anecdote is an extreme example and
hopefully not a common experience. Nevertheless, how
can you ensure that you don’t find yourself in a similar
position? If I can paraphrase a bit here—“hoping to
capture additional assets” may not be the most credible
strategy for growing revenue. You always want to clearly
define the services that are to be rendered for the fees
paid. You can still bundle a variety of services under the
AUM fee; just make sure that you are doing so in a
cost-effective manner.
Clients with more AUMmight be entitled to more bundled
services, for example, while smaller clients—perhaps
younger investors just getting started—receive the basics,
such as budgeting or a simple financial plan. (Remember:
As Brian wrote in the last issue, it is generally not the
clients with $1 million or more in investable assets who
blow up your margin.) Then, if clients want to avail
An Argument Against the “1% and Everything Else”
Fee Schedule
GREG GOHR
“It is not from the benevolence of the
butcher, the brewer, or the baker that
we expect our dinner, but from their
regard to their own interest.”
—
Adam Smith,
The Wealth of Nations
