While the asset under management model has begun to shift from products and sales to ongoing advice and relationships (albeit due to asset acquisition and custody), it has nonetheless marked the first step towards "fee-for-service" financial planning, where the client is "paid" for advice (rather than simply being compensated by product sales). The caveat, however, is that by charging fees based on assets under management, only a small percentage of Americans have been able to hire such advisors based on assets under management, as the model requires clients to have both liquid funds that can be managed in sufficient quantities and be inclined to delegate management to an advisor in the first place. it is estimated that this is no more than about 7% of Americans. Advisors who calculate assets under management therefore miss out on a large portion of the population that might be interested in it and have the financial means to pay for financial advice, but simply cannot access it through a minimum asset management model. Wealth plus income. Another approach to setting consulting fees is simply based on the client`s financial resources to be paid in the first place. Assets under management fees, of course, work in part because they are always "affordable" compared to assets under management (since they are literally calculated as a percentage of those assets); Similarly, the "net worth plus income" commission is calculated on the basis of the client`s total income and net worth (but in particular independently of the "investable assets"). For example, consulting fees could represent 0.5% of net worth plus 1% of adjusted gross income (AGI). While this option isn`t common, it`s growing in popularity, and many advisors tend to do so because net worth helps eliminate some of the conflicts of interest that asset under management billing is known for, such as deciding whether to pay off a mortgage or saving money for retirement (mortgage repayment affecting an assets consultant`s fees, but has no effect on net worth plus income costs, since calculating net worth does not promote debt repayment or saving for retirement, since the balance sheet is the same in the end). Most consultants tend to charge too little when they first start their business and evaluate the value of their advice. In XY Planning Network`s first comparative survey in 2017, 100% of XYPN consultants who used a monthly fee-for-service structure had increased their fees in the first three years of their operations compared to levels at which they initially charged too little. Today, financial planning is evolving into a practice focused on advice and relationships, regardless of the products to be implemented or the assets to be managed.
However, how advisors charge for such financial advice requires serious consideration – a phenomenon that was not necessary in a product-based sales world (as commissions were set by the company) and less difficult in a world of assets under management (where the 1% AUM fee is so ubiquitous), but creates serious challenges for fee-for-service advisors trying to sell a purely intangible service such as financial planning. Simply put, "advice" is a challenge to the exact value and price. For this reason, with a fee-for-service model, it is especially important to get clients to pay an additional 3% to 5% each year. Ideally, consultants can even incorporate the increase into the financial planning agreement itself, so the fees increase "automatically" under the existing agreement. And keep in mind that it`s much easier for most customers to accept a 3% fee increase per year than 12%, 15% or even 20% every five years (which is a hell of a blow to take everything at once!). Simply put, standardizing fee increases (into small, manageable bites) allows customers to get used to it better and makes it easier to increase the bill. When determining a consulting fee structure, you can choose from many options. The good news is that this means that the advisor can structure the fees in a way that best suits that individual advisor. The bad news is that it`s often difficult to decide on a structure because there are so many options – the infamous "paradox of choice" problem? And even if you`ve chosen the approach – fixed fees, staggered fees, hourly (time-based) fees, or project-based fees – it`s still necessary to set the actual amount of fees, which is both what the advisor needs to earn to be profitable and what the client pays for the services provided. .