As flat fees grow in popularity, here’s what you need to know.
According to Advyzon user data, 26% of firms now use flat fees. While these firms may not be using flat fees exclusively (and likely aren’t … more on that later), it’s clear the flat-fee trend has staying power.
Evangelists think flat fees — where advisors charge a set rate for services, instead of a percentage of assets under management — are a more equitable way to bill, since having more assets doesn’t necessarily make you a more complicated client. Others maintain that percent AUM is industry standard for a reason: It’s a more realistic business model for advisors.
The debate accelerated in 2020 thanks to a perfect storm: A market selloff led to a big dip in asset-based revenue at the same time advisors were called on to work more as they assuaged the concerns of their rattled clients. RIA guru Michael Kitces estimated some firms may have seen asset-based revenue drop by as much as 20%.
Of course, flat fees aren’t the only way to smooth out these market-based dips. Using average daily balance in your billing (taking the balance of a client’s account every day over your reporting period and averaging those out to get the balance you bill on) is also increasing in popularity.
What your peers are charging
About one in four firms are using flat fees in some capacity now, according to our data. That number “was higher than I expected,” said Charles Rowlan, Senior Vice President of Business Development at Advyzon. “The trend is definitely moving more toward incorporating some type of flat-fee element.”
This could be a planning fee, or an add-on, and doesn’t necessarily need to tie to investment management. In fact, some advisors prefer to use a flat fee for financial planning services, then charge a percentage of AUM for investment management.
There are some trends beyond the headline number, as well. For instance, flat fees are more popular with firms managing more than $100M in assets.
(To see a breakdown of user data by firm size, download our white paper. In addition to the data, you’ll find ideas and takeaways to help you assess your own pricing and billing.)
How firms are billing
It makes sense that many of the firms charging flat fees aren’t charging flat fees exclusively. Most firms — about four out of five — use multiple fee schedules. Multiple schedules are also more common at firms managing more than $100M.
Of course, a number of those firms are using multiple fee schedules without incorporating any kind of flat fee, so we wanted to look at industry trends in this type of billing, too. Most (85%) of firms favor tiered pricing. Diving further into that, we see that 76% of those firms prefer blended tiers, while 24% prefer a best tier model.
When it comes to advance versus arrears, it’s roughly even. Some 52% of firms bill in advance while 46% bill in arrears. There’s a noticeable difference here in firms with higher AUM, however.
When it comes to frequency, 21% of firms bill monthly while 74% bill quarterly. It’s interesting to note that the preference for quarterly billing may come from its industry-wide popularity. Breakaway firms tend to favor quarterly pricing since it’s what they’ve always known. However, the original reason for quarterly billing doesn’t necessarily exist anymore. In the past, calculating balances, collating reports, and handling the paperwork were simply too much work to tackle more than once per quarter. And while billing four times a year is always going to take less time than billing monthly, financial technology has sped up the process significantly. (For example, we typically estimate billing will take 30-60 minutes per cycle.)
Monthly billing can help with cash flow, especially for advisors used to being paid monthly. It can also help smooth market volatility since you’re taking more snapshots of a client’s balance.
However, we’re also seeing more clients — 16% of Advyzon firms — use average daily balances to address this issue. According to Rowlan, though, it’s one of the fairest ways a firm can bill. “It can be a bit more complicated to explain the numbers to clients,” he explained, adding that, “Intuitively, clients understand the concept and like it, but you’ll have to do more to show how you got your totals.”
(Reminder: You can see breakdowns of this data by firm size in the white paper.)
Takeaways for your practice
“We get questions about just about every element of fees and billing. Advisors want to know what other firms are doing, whether it’s billing in advance or arrears, quarterly or monthly, average daily balances, everything,” Rowlan points out. “Most of these questions come from breakaways, but existing firms ask questions, too, about how to do things better, whether that’s using flat fees or building in average daily balancing.”
We pulled this data to help you get a sense for what your peers are doing. But at the end of the day, success with fees and billing comes down to two things: clients and cash flow. You need to have fees and billing practices that clients find fair. Regardless of how much you charge, if your clients don’t see the value you’re providing, the number will feel off. You also need to generate enough cash flow to create a profitable business.
That sounds very basic, particularly to advisors who help clients with personal cash flow, but for breakaways who haven’t had to worry about profit and loss, it can take some practice to get comfortable. That’s why we also wanted to look into some research-based takeaways to help you handle these issues for your firms.In our full white paper, we explore cash flow best practices and how you can apply them to an advisory. We also look at how behavioral psychology can help you talk about pricing with your clients. (Yes, the same behavioral psychology that you’ve probably considered when thinking about risk and portfolios.)
