- Compensation models have shifted from a transaction-based model of compensation
- The predominant method of compensation that has emerged has been the Assets Under Managements (AUM) model
- The profession is in need of a fee model that represents these new value-added services. The authors present the retainer as a potential solution
As the profession of financial planning has evolved from an industry focused on product sales to providing and implementing a client’s financial plan, compensation models have also shifted from a transaction-based model of compensation. Authors Ken Robinson and Jacob Kuebler through the Alliance of Comprehensive Planners explore how financial planning services and compensation continue to evolve in their White Paper “The Financial Planners’ Retainer: A Reflection of Real Value”, published in September.
The predominant method of compensation that has emerged has been the Assets Under Managements (AUM) model, says the document. While there are many advantages to this model, there is no reason to believe it is the ultimate evolutionary development in fee-only compensation. Limited markets, increasing competition, and regulatory concerns have contributed to some advisors’ interest in other fee-only compensation models.
Just as important, disconnects often exist between the value added for clients and the effort required by the advisor to deliver services. Service models have continued to evolve to include the emergence of new values added beyond maximizing economic value. These include attention to the client’s life values, behavior, and how those characteristics affect their financial well-being.
Therefore, the profession is in need of a fee model that represents these new value-added services. The authors present the retainer as a potential solution.
The retainer is a value-based system that increases compatibility with newer service models and aligns the advisor-client relationship, specifically with new fiduciary standards. Further advantages of the retainer model include resistance to commoditization, the ability to provide service profitably to a much broader market,
and adaptability to a wide variety of services the advisor may wish to make available. Not being tied exclusively to the value of assets managed, the retainer removes the implied (and erroneous) understanding that investment management is the sole service of value being provided in a planning relationship.
The work explains there are potential disadvantages to the retainer model. These include saliency of the fee payment, and limitation of the client’s ability to make apples-to-apples comparisons between different advisors’ fees and the benefits offered. Additionally, there is some risk that the advisor will perform less work than he should, or will spend more time than is profitable, when the fee is fixed at the outset. Each of these risks can be mitigated successfully so the retainer model of fee-only compensation can provide the advisor a competitive and financially successful professional practice.