Mark P . Hurley
Mark P . Hurley
THE BIG PICTURE
ents manage the extremely complicated relationship that everyone has with their money .
More specifically , money is only a means to an end . And it is a wealth manager ’ s job to help clients diagnose their problems and goals and then organize and plan their finances to solve and achieve them . Accomplishing this involves helping them navigate a maze of often very emotional decisions , and this helps the advisor build deeper relationships with them . Indeed , virtually every wealth manager at some point has been told something by clients that they would not share with their spouses .
But it is also very hard to put a price on this value . It ’ s impractical at best trying to come up with some sort of flat-fee arrangement for things mostly intangible and for which the work involved varies greatly for different clients .
Second , the AUM fee model is not going anywhere because wealth managers recognize that they would be insane to abandon it . After all , this approach to getting compensated is just another type of subscription model — since it automatically renews unless the client elects to opt out . However , it is also the greatest subscription model ever because of how its fees increase over time .
More specifically , because client portfolios typically include large equity allocations , AUM-based fees are closely tied to equity market returns and they have historically increased at a rate that is much , much higher than inflation . Advisory fees also automatically increase as clients save and invest more , even though only de minimis additional work is required . In other words , this compensation structure pays wealth managers a lot more money while not — at least for now — forcing them to provide much more incremental value .
Advisors have been able to get away with all of this because the resulting fees are largely invisible to clients . The model doesn ’ t force the clients to write a check each quarter ; instead , advisory fees are automatically deducted from their accounts and only later show up on their statements . Just imagine how different and difficult things would be for wealth managers if clients had to decide every quarter whether they wanted to pay another $ 5,000 or $ 10,000 for financial advice , especially after a market downturn .
To be sure , notwithstanding the emotional connection many often have with their advisors , at some point clients are going to start to wonder why they are paying so much , especially if investment returns revert to their historical averages . That said , rather than reduce fees or shift away from the AUM model , wealth managers instead are going to go up the value curve , providing additional services . Indeed , competitive forces alone will soon force everyone to do so .
Notwithstanding the emotional connection many often have with their advisors , at some point clients are going to start to wonder why they are paying so much , especially if investment returns revert to their historical averages .
More specifically , a small number of large industry participants have decided to capitalize on their scale and now offer to do a lot more for clients for the same fees that they currently pay . They provide a broader array of services that varies between firms but can include bill pay and receivables management , help with a client ’ s personal cybersecurity or even the drafting of estate documents — all of which are “ fully integrated with your financial plan .”
Far more important , these firms are also expanding from just helping clients manage their wealth to also playing a role in helping them create it . Such services include helping business owner clients run better , more profitable compa- nies and more fully monetizing that value . These firms are also helping certain clients plan their careers and maximize their earning power .
Their websites show that these more aggressive competitors now even offer business service technology as well as payroll services . Granted , not all these services are included without additional charge . But they are offered at attractive prices and are delivered in a manner that simplifies client lives .
Undoubtedly , many industry participants will find it disconcerting that they have to do a lot more for the same dollars . Most make a nice living without having to work too hard and want nothing to change . Moreover , for decades wealth managers have largely competed on the quality of their advice , as well as their sophistication and empathy , not on the scope of their services based on cost .
In any other industry , such changes would be considered unremarkable . It is how big companies regularly squeeze their smaller competitors . The only thing that is really surprising is how long it has taken these attitudes to take root in the wealth management industry . Soon every participant will have to find ways to do more for the same fees .
What other choice do they have ? The alternative is that they wait for their clients to discover that their friends are getting a much better deal from another financial advisor . And nothing would be more corrosive to a trusted relationship than for a client to discover that their advisor had been grossly overpricing services .
The advocates of the flat-fee subscription compensation model are right in at least one aspect . Clients want , deserve and will soon get a better deal . However , it will not be driven by a shift away from the AUM-fee model . Rather , to preserve what can only be described as a fabulous way of getting paid for providing advice , industry participants will jump up the value curve and aim to make a bigger difference in their clients ’ lives .
MARK P . HURLEY is the CEO of Digital Privacy & Protection ( www . dpripro . com ).
16 | FINANCIAL ADVISOR MAGAZINE | JUNE 2024 WWW . FA-MAG . COM