In the last year or so, there has been much talk about the use of
retainer fees among independent advisors. For many, this compensation
model appears to present little benefit to either the firm or its
clients, compared to the more-prevalent assets under management (AUM)
fee model. Others, however, consider the use of retainers an improved
variation of the AUM model, one that effectively eliminates many of
its inherent shortcomings.
Based on AdvisorBenchmarking's latest survey of 1,093 independent
advisors, we will provide in this issue a statistical assessment of
the retainer model among advisors, the impetus for its use, and the
outlook for its growth. Additional findings of our latest survey will
be featured in this newsletter throughout the remainder of the year
and in the 2004 annual RIA Marketplace Study , which will be available
in its entirety this fall.
Retainer Fees Defined
There is little consistency in the marketplace regarding the
definition of retainer fees. From a research and analysis standpoint,
AdvisorBenchmarking defines retainer fees as:
o A lump-sum payment that is charged once at the outset of the
client relationship and/or every year thereafter
o A fee that may apply to some, but not all, clients, and is
almost never the sole source of compensation for the firm
o A charge to the client as an addition to or in lieu of AUM or
other fees
o A fee that may vary by client and, in some cases, is tied to
the size of the client's assets
o A fee that is non-inclusive of hourly fees for financial
planning
Using the definition above, our research shows that 27.3% of advisors
use retainer fees today. Among those advisors, around 22% of their
2003 revenues were generated from such fees. Curiously enough, a tiny
minority (1.2%) utilize retainer fees as the sole method of
compensation for the firm, generating 100% of their 2003 revenues. The
impact of retainers on revenues varies among advisors, as shown in
chart 1 below.
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src="http://www.investmentadvisor.com/images/0604-Chart1.gif" alt=""
width="338″ height="203″ border="0″>
Why Use Retainer
Fees?
Many advisors cite such reasons as "ensuring objectivity" as
their motive for using retainer fees, referring to the fact that the
clients' assets become irrelevant to compensation.
However, in line with our expectations, we found that the primary
explanation for the use of retainer fees (cited by 35.9% of advisors)
is the firm's desire to ensure proper compensation for its
financial planning services. For years now, many advisors have
considered financial planning to be a loss leader, providing the
service for free in return for managing the client's assets. But
in an era of complex wealth planning needs, some advisors are taking
the right step of properly charging for the valuable services they
render to clients.
A close second is the firm's intention to emphasize its
non-investment management services (25.8%) and enhance the firm's
perceived value beyond managing money. By charging clients based on
providing services other than the amount of assets, advisory firms
help clients more clearly understand that the firm's value
