Mark Twain, author of the quote in the title, was never an FA. He began his career as a riverboat pilot on the Mississippi and later became a world famous writer. But he knew a thing or two about life and about money—or lack of money— since he lost most of what he made by ill-conceived investments.
No doubt Twain would have agreed with Cannon Executive Vice President and Retirement Services expert Larry Divers, “FAs need to think beyond the traditional pricing mechanism of AUM and develop an alternative system that works for them.”
Assets worth $24.7 trillion dollars are currently held in US retirement accounts, according to the 2015 Year Book of the Investment Company Institute. That’s a lot of money by anyone’s counting. So this new US Government ruling directing financial services professionals to handle assets in retirement accounts in a completely different way is an event of great significance—a polite way of saying that for those of us in the industry this is equivalent to an earthquake.
How big of an earthquake? “This new DOL Rule will cause as much of a change in the retirement services arena as the passage of ERISA itself in 1974,” says Larry. The biggest recorded earthquake in U.S. history was the Great Alaskan Earthquake of 1964, coming in at 9.2 on the Richter scale, the second most powerful earthquake ever recorded. Will the DOL Fiduciary Rule be that bad? “No,” Larry says, “not even close although it may feel that way.  The reason it might feel that way is many FAs could experience a negative impact on their fee income. I think we all agree that a reduction in income is less than desirable.”
What to do? While charging a percentage of assets under management has been the industry standard for many decades, our Retirement Services expert Larry Divers says there are other pricing models. So I asked Larry to tell us about new and different pricing models he has observed in his travels around the country. He enumerated the following:
- An hourly fee for service. This is appealing to a subset of clients. The FA doesn’t manage the client’s money, rather the FA advises on assets, asset allocation, risk vs. reward ratios, taxes et al.
- Monthly retainer. While still managing the client’s assets, FAs charge a monthly retainer rather than charging based on assets under management. This can work well with smaller accounts.
- Blended fee structure. Closely related to the monthly retainer model, is a blended approach which entails a monthly base fee, or retainer, plus an additional asset based fee for relationships of various sizes and complexities.
- Charging a retainer based on the net worth of the client. While this is a dramatically new model and more in the discussion phase that actual use by FAs, it has a certain logic to it. For example, this model would draw in real property, art collections, the value of a business the client owns, hard assets like gold and diamonds, and sources of income outside of traditional securities. By doing this, an FA would be able to see a client’s total asset picture and quickly diagnose if the client is overweighed in one or more asset categories. Example, someone owns four homes worth ten million but only has four million in their portfolio of securities. This becomes an item for discussion since clients may not have realized their asset allocation across asset classes is out of sync.
- Charging a flat fee which is the same for every account no matter what the size. This fee has to be high enough to compensate the FA for average time spent and clients will “self-select” on perceived value they are receiving.
“These are just a sampling of new pricing models being used,” Larry says. “When the DOL Fiduciary rule is fully implemented, FAs will discover many new ways to charge clients beyond the classic AUM.”
In situations such as this well-meaning people often chirp: “change can be good. It will create new opportunities. Embrace it!” Perhaps. But when the change is happening to you it doesn’t feel this way.
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