How Do I Know If I Am Billing Too Much or Too Little?
Owners of RIA (Registered Investment Advisor) firms are constantly faced with the question of how much should be charged to clients in fees. An RIA study conducted in 2018 found that the average investment advisory fee comes to around 0.95%, while total fees come to about 1.22%.
RIA firms are undoubtedly evolving in scale, but their fee structure hasn’t changed much in recent years. Just over 95% of individual advisers were paid as a percentage of AUM (Assets Under Management) in 2017, 2018, and 2019, respectively. A smaller percentage of these firms collected commission payments — 3.2 percent in 2019 compared to 4.1 percent and 3.6 percent in 2017 and 2018, respectively (Source).
Some RIAs provide services based on commissions, while others combine both commissions and fees. However, many RIAs are switching to fee-only service by doing away with broker-dealers. You may not be entirely sure about the fee structure of your RIA firm when you are just starting up. That’s understandable. However, it is imperative that you learn about the kinds of fees that RIAs can charge to ensure you are not billing your clients too little or too much.
Determining the fees for service provision
Fee-only financial planning can offer both clients and planners many advantages. One advantage is that clients know how much they are paying and what they are getting in exchange for their money. Since RIAs have a fiduciary duty to provide advice in the best interest of their clients, the fee structure has to be in line with this duty. Here are some ways to determine your fee structure:
- Hourly fees
Some RIA firms charge their clients based on hours spent advising them. This fee structure is typically appropriate for investors who lack enough capital to warrant the management of their portfolio and assets. Hourly fees generally apply to financial planning, consultancy services, and special projects. The average hourly fees can range from 100 to 400 dollars per hour, depending on the service provider and the nature of the project.
- Flat fees
The calculation of this fee structure refers to a percentage of AUM on a particular date every year. The higher the AUM, the lower the percentage. For example, if AUM is two million dollars or less, then the flat fee would be around 1.5%. The fee can go below 1% for assets worth more than 25 million dollars.
- Fees by the class of assets
One option of fee structure is to charge different fees for managing different types of assets. For example, you may charge a 1.5% fee for managing the equity portion of a client’s portfolio. On the other hand, you may charge 0.75% for managing their bonds or some other investments that reap a fixed income. This approach proves more favorable for certain investors who hold vast cash reserves for years, only to use them rapidly when the time comes.
- Tiered fees
Under this fee structure, your RIA firm can charge differing fees for managing assets of clients depending on the level of their portfolio. All clients, regardless of their account size, have to pay the same rate on the same deposit, thereby making it fair for everyone. Say, for instance, you are managing your client’s portfolio worth 20 million dollars, and they decide to break the fee payment. You can charge 1% on the first five million dollars and 0.75% on the remaining 15 million dollars.
Since RIAs generally get paid for offering their services irrespective of their fee structure, these firms also tend to provide additional services. Social security analysis and end-to-end financial planning are two good examples of additional services that RIAs may provide.
Generally, some find that fee-only structure is preferable because it may provide tax advantages to certain clients. As each client’s tax situation is different, the client should consult with his/her tax counsel, though.
While some advisors gravitate towards one of these billing strategies over others, other advisors employ a multi-faceted approach to their billing. Successful strategies are not one-size-fits-all. For maximum long-term success, the advisor should choose the strategy for his/her firm that aligns with both the firm’s and the client’s goals.
This article is not intended to serve as tax or legal advice, but merely for general informational purposes. You should consult with your tax and legal advisors regarding the implications and consequences surrounding the actions discussed herein and its impact on your, and your firm’s, specific situation.
Compass CFO Solutions LLC is the leading provider of outsourced CFO, accounting, and bookkeeping services to the wealth management industry. Compass CFO Solutions’ services allows RIA firms to spend more time growing their business. Learn more at www.compasscfosolutions.com.