InvestmentNews: The advantage of tiering your advisory fees
Advisors understandably tout the advantages of charging clients a flat fee, foremost among them that it aligns the advisor’s interests with those of the people they serve. And, for over a decade, that model has been terrific for just about everyone concerned.
Until now.
With the markets straddling bear territory for the better part of 2022, advisors who charge a flat fee of 1% across the board are feeling the pinch of the down market more than those advisors that “tier” their fees based on the amount of the assets they manage for each client.
From the article …
There’s nothing like a bear market to illuminate the superiority of a multi-faceted pricing structure for advisory firms.
When markets are rising, advisers love the AUM fee model. Revenues rise without having to provide any additional services, or even market to add new clients, while the workload typically remains manageable because the bulk of clients are happy with their statements.
But it’s clearly a different picture when markets begin to decline, as revenues fall while the needs of clients’ exponentially increase.
For most advisers, it’s extremely difficult to adjust costs during a down market because a vast majority of a firm’s expenses are related to labor. Reducing a firm’s headcount when client demands are skyrocketing isn’t a winning business strategy. Those advisers who have either a tiered fee schedule or an annual retainer, or both, hold up dramatically better during rough markets.