Advisors Weigh Fees Based on Services, Not Asset Values

Financial advisor D. Randy Waesche is calling for broader use of service-based fees, which charge for the work performed and responsibility assumed rather than automatically tracking the value of a client’s portfolio.

Waesche, a fellow at the Family Firm Institute, has worked in financial services for 50 years. He described the change as part of a longer shift in advisor compensation. When he began his career, commissions were the main payment model. Fee-based and fee-only arrangements expanded during and after the 2008 financial crisis, when clients and firms placed greater emphasis on transparency and fiduciary standards.

Lower-cost brokerage services and index funds also reduced the price of securities transactions and investment products. Those changes increased pressure on advisors to explain how they serve clients beyond managing portfolios.

For affluent families, advisory work can include retirement planning, tax strategy, estate planning, family governance, business succession, charitable planning, risk management and advice on major financial decisions. The amount of that work does not necessarily rise when a client’s investments increase in value.

For example, a portfolio that grows from $20 million to $25 million could produce a 25% increase in an assets-under-management fee, even if the advisor’s work remains unchanged. Waesche questioned whether that increase reflects the services provided.

Flat fees, retainers and hybrid arrangements can offer alternatives to the assets-under-management model. Fees can be reviewed when a client’s needs or an advisor’s responsibilities change, without automatic increases tied to market gains.

Waesche’s fee-only firm worked with family businesses and multigenerational families. After the firm was sold, the acquiring organization shifted many client relationships to asset-based pricing. Some families who had worked with Waesche for decades later told him that their annual fees had increased fourfold or fivefold, even though the investment management and advisory work had not expanded by the same amount.

He added that asset-based compensation can make it harder for clients to recognize services unrelated to portfolio management. Service-based pricing requires advisors to explain the work they perform, the reason clients need it and how the fee is set.

Waesche does not expect the assets-under-management model to disappear. He said it remains suitable for some clients and firms, while high-net-worth clients may seek pricing that reflects the complexity of their relationships, the services provided, time, judgment and responsibility rather than the size of an investment account.