Unless you live in rural Afghanistan, you're probably aware of the current conversation going on in the independent advisory industry about whether flat retainer fees might be better for clients (and advisors) than AUM fees.
As far as I can tell, most of the discussion is focused around whether flat fees have fewer conflicts with client interests, are more in line with financial planning services, provide more predictable advisory revenues, and/or better align advisor-client interests than does the AUM fee business model.
In our experience, the answers are: maybe, yes, definitely, and probably not.
(See a sampling of Bob Clark's blogs on the topic: The Case for Charging Both AUM and Flat Fees and Are Flat Fees Really Better for Clients—or for Advisors?)
More important, though, our experience also tells us that for most advisory firms today, thinking about their fee structure should be way down on their to-do lists. Contrary to much of the conversation that I've seen, determining one's compensation structure isn't a moral statement; it's a business decision.
Moreover, it's a business decision that can only be arrived at after firm owner(s) have determined who their target clients are, what the needs of those clients are, and which of those needs their business is going to provide. Only then can they decide how they're going to charge for those services.
For instance, if your target market is small business owners, and you've decided to provide their business insurance (in addition to other services), the law says you're going to have to charge commissions. Or if you work with successful stock brokers, who like to brainstorm about stock ideas, and frequently trade on them, you're going to have to charge securities commissions. And if you work with wealthy widows, you'll probably need to register with banking regulators to charge a fee for trust advice.
Once you've determined who your target clients are and what services you're going to provide to them, there's still one more thing you have to do before you start thinking about your compensation: articulate your "value proposition." What does that mean? Figure out exactly how you're going to describe what you do for your target clients in a way that resonates with them.
Once you know how to tell your target clients what they want to hear, then you can decide how to charge them—based on their needs, not yours.
