The following are in response to Bob Veres’ article, The Alternative to AUM-Based Fees: The Total Profitability Retainer Formula, which appeared on July 31:
Dear Editor,
A strikingly elegant solution to the question of AUM versus retainer is simply to add to your published fee schedule, after a specified breakpoint, the word “negotiable,” The breakpoint can be at $5 million, $10 million or wherever appropriate. This provides AUM-based compensation up to the specified level while allowing flexibility on pricing for HNW clients who are justifiably averse to paying a percentage on a large sum. In effect, you convert those clients to a retainer, while maintaining AUM-based compensation on the rest.
To paraphrase an adage that every woman has heard from their mother or grandmother “Why pay for the cow when all you want is the milk”? (The adage was “Why buy the cow when you can get the milk for free”, implying that no man would marry a woman if he received her gifts gratis.) The analogy that Bob has aptly identified is that a HNW client does not want to pay 10 times more for services (i.e. buy the cow) than an affluent investor who is on an AUM schedule geared to a lower investment base. Their reluctance is justified. A negotiable fee schedule can achieve the desired result of a retainer for targeted clients.
Susan Freed, CFP®
Freed Advisors
Chevy Chase, Maryland
Bob Veres replies:
Susan, that's very good. My article tended to focus on the side where the client is underpaying for services rendered, so this balances it somewhat, showing how to handle the "overpaying" side of the ledger.
Now I have to figure out what to do with this cow that I bought when my wife sent me to the grocery store for milk...
Dear Editor,
I follow many of Veres’ professional articles, and always feel that he provides valuable information. This particular article is no different. I agree with his general conclusion that some clients are underpaying, while a few are probably paying more than they should really have to pay. Veres’ article suggests a practical approach to rectifying the situation in an orderly fashion.
I suggest that you consider a follow-up article that talks more about the conversation one is having with the non-profitable clients. I am sure that conversation varies by advisor, given different personalities and approaches. But if you were to explore it with a few advisors who you know to be doing this type of thing, it would be very interesting to hear samples of that conversation, and their feedback on what works and what to avoid.
I’d also be curious to hear Veres’ thoughts on solutions to the problems that might arise from his suggested approach. For example, if you have the conversation and successfully raise someone’s fees, should you then expect to revisit this on a regular basis? Is the client likely to come back later and ask you to lower fees because now they’re keeping track in their own minds of how many times they call you and the extent of services they require? Are we inadvertently causing the client to focus on the wrong things – indirectly feeling it’s bad to call you or bother you because that might cost them more money, which might cause them to put off addressing planning issues that would really be best handled sooner rather than later?
My questions above might suggest that I disagree with what Veres is suggesting. Actually, I feel quite the opposite. I would love to find a pricing model that makes sense to me and to the client. It would be nice to have a model that’s based on more than just “industry standard.” But I also don’t want to create new problems that don’t currently exist without trying my best to think through how to solve them before they happen.
I look forward to Veres’ future writings on the subject of AUM and pricing.
Sincerely,
Michelle Ash, CFP(R), CDFA(TM)
Managing Partner
Paragon Wealth Strategies, LLC
Jacksonville, FL
