24
For Advisor Use Only
March/April
2014
Wealth Management
/ Investments & Research
themselves of additional services, make it clear that you
reserve the right to charge hourly or project-specific fees
if their request falls outside of your standard service model.
An ancillary benefit of developing a service model where
you charge ongoing consulting fees is that those fees can
theoretically act as something of a hedge during a market
drawdown. Consider Figure 1, which illustrates an AUM
fee for accounts of various levels but also adds an annual
consulting fee for specific services. The Total Revenue
column is the sum of the AUM fee and the consulting fee.
The 20% AUM Decline column is the sum of the annual
consulting fee and the AUM fee if investable assets are
reduced by 20 percent.
As you can see, the inclusion of an annual consulting fee
can function much like an allocation to fixed income does
in client portfolios—dampening volatility. Of course, this
presumes that clients will continue to pay the consulting
fees through good markets and bad. As long as the targeted
services are tightly in sync with client needs, there is plenty
of value to be delivered.
But Not a Charity
I started this article with Adam Smith’s syllogism of the
butcher, brewer, and baker from 18th century agrarian
Scotland because it is arguably just as apropos in the
21st-century financial arena. Reasonable clients should
have no expectation of receiving professional services
gratis—in fact, the reality is often quite the opposite, as
many people have become skeptical of low- or no-cost
services. Although it is common for advisors to engage
clients in discussions of their charitable inclinations,
beware that you don’t inadvertently put yourself in the
business of providing “charity” to your clients. Keep
your fee schedule visible and protect your profit margin.
Greg Gohr is the vice president of investment and
advisory products and services. He is available at x9136 or
at
Figure 1. Sample Fee Schedule Incorporating AUM and Consulting Fees
Investable
Assets
AUM
Fee
Annual
Consulting Fee
Targeted Consulting Services
Total
Revenue
20% AUM
Decline
Revenue
Impact
< $100,000
1.35% $1,000
• Basic Financial Plan
• Retirement Planning
• Education Planning
• Budgeting
$2,350
$2,080
–12%
$500,000
1.20% $1,500
• Financial Plan
• Estate Planning
• Risk Management
• Tax Management
• Stock Option Planning
$7,500
$6,300
–16%
> $1,000,000
1.00% $2,500
• Advanced Financial Plan
• Wealth Transfer
• Risk Management
• Tax Management
• Stock Option Planning
• Coordination with Other Advisors
• Charitable Planning
$12,500
$10,500
–16%
Source: Commonwealth
