Retirement Income and Advisory Fees

February 17, 2017 12:00 pm

As 2017 is well under way, the discussion continues around whether financial advisory fees should be based on a traditional percentage of assets under management (AUM) or instead be under a retainer fee structure. While we are in the early innings of this debate, for this entry I am just going to focus on fees charged to those clients or investors currently retired and withdrawing income from their portfolio.

For those who have entered retirement or are about to enter this next adventure in their life, its widely accepted that personal needs change when transitioning from asset accumulation mode to establishing sustainable lifetime income. Given a primary goal of creating a retirement income solution, would a larger client portfolio require more time and energy of the adviser over say a smaller portfolio to accomplish a similar solution?

For example, when evaluating two retirees who have $500,000 and $1,000,000 of investable assets respectively, should the individual with more assets be charged twice as much? Under a traditional AUM fee structure, its likely the client with a greater amount of assets would be charged more or double the amount. I’m not suggesting their fee should be exactly the same, however, we know from helping our own clients in retirement income mode that it typically does not require twice as much work as well as justify perhaps two times the fee. Under this philosophy, you just as well could make the same argument for two clients who have $2,000,000 and $4,000,000 of investable assets (This is referring to traditional mutual fund and ETF portfolios and not obscure estate planning cases, complex income needs, or private equity solutions where fees will vary).

This difference in advisory fee structure can cost retirees tens of thousands of dollars or more of additional fees. While I’ve discussed this with several advisers across the industry, it seems there are two schools of thought for each approach. It’s important to remember that a retirement income solution is more than just an asset allocation. Investment advice can be a large majority or the only service some financial advisers provide (while claiming to deliver a holistic income solution to their clients). However, our Firm views retirement income solutions from a different lens.

We not only develop the income distribution strategy, but also provide additional financial advice which may include a tax planning overlay, an asset protection review, or an estate planning analysis to ensure things are in place as clients desire, just to name a few. Managing investments is a part of the solution. However, we integrate this into one’s financial planning and income needs and not the other way around.

Our Firm’s preferred approach is to offer a flat retainer fee that is aligned with the advisor’s value add based on the retiree needs and circumstances. This also provides an objective and flexible approach to allow the advisor to use any solution that would help their clients, which may extend beyond traditional mutual funds and ETFs. As a fee-only fiduciary, this allows us to be conflict-free with our independent advice.

In full disclosure, our Firm can and does apply an AUM fee schedule to those still working, running small businesses, and/or looking to enhance their financial picture leading up to retirement in the future. Similar to our clients who are retired, we also have the flexibility to offer a retainer model for this working audience if it’s in the clients’ best interest. While some advisers continue to debate our approach, our conviction and proof of concept is in the feedback from our clients under this type of engagement where it has been well-received across the board.

Contact us today to learn more.

Best,
Marc

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This post was written by Marc Jimenez, CFA, CFP®

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