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Some advisory firms have been slowly shifting away from billing on assets under management toward assets under advisement — i.e., assets on which an advisor may make recommendations, but not necessarily effect any transactions. The appeal of such an approach is understandable: Qualified plans are an ever-increasing piece of clients’ nest eggs, especially for those in their 30s, 40s and 50s. And while a potential client might have significant net worth, much of it may be tied up in accounts that the advisor can’t directly manage.
The AUA movement is not without operational challenges, however, that advisors need to consider before adopting. Here is a primer on a new, novel yet tricky fee structure.
Most advisory firms that work with prospective clients who hold significant held-away assets approach it in one of three ways. The first assumes that the firm manages a brokerage account, even if that’s not necessarily profitable, in the hope that they’ll get the 401(k) rollover down the road — which will be bigger.
Now, if you can serve a $150,000 client profitably at that price point, great, but if you need a higher one to be profitable, waiting upward of 10 years for that big rollover may just be too long.
Consequently, some advisors handle the situation by not setting a minimum AUM threshold. If your normal minimum is a $250,000 brokerage account and you charge a 1.2% fee, you’ve essentially determined that your minimum fee per client is $3,000. So rather than having a $250,000 minimum, you could just charge a $3,000 minimum fee instead and give the client holistic advice beyond the portfolio.
And if your advice is worthwhile, the client will gladly pay their $3,000 holistic fee, especially since relative to the client’s overall net worth — which may be more than $500,000 of investment assets — $3,000 is a very reasonable sum.
There’s a third option though, and one I want to discuss in greater detail. This approach bundles holistic advice for all a prospective client’s investment assets, including their outside 401(k) plan. The fee starts at 1.2% for accounts under management and 0.6% — or half the AUM fee — for outside accounts under advisement. That 0.6% fee nets the client ongoing advice and guidance on...