Younger generations may drive the switch to alternative fee schedules.

We’ve been talking about advisor fees for a long time.  Our original fee paper, Fees at a Crossroads, debuted in 2015 to wide interest and our follow-up, Fees at a Crossroads Revisited (2018), remains one of our most requested topics at study groups and conferences.  Typically, when I present the papers, many of the advisors in the room say they haven’t added alternative fee schedules.  Most of them, in fact, think the conversation is interesting but don’t believe they need to change. They are wrong.

It’s true that many of my peers believe the assets under management (AUM) fee model is here to stay.  They say that boomers and the greatest generation will want to remain in the AUM model and that younger clients, when they accumulate wealth, will buy into that model too.  My guess is that most advisors would love to stay in the AUM model since the fees are not very transparent, can be deducted out of the client’s account and, since they are tied to the market, provide built-in fee increases when the account value goes up. 

Let’s be honest, many clients like it too — out of sight out of mind.  But does that mean things won’t change?

Using technology and social media as an example

people on cell phonesA few days ago I came across a post called “Visualizing Social Media Use by Generation” on one of my favorite websites, the Visual Capitalist. I had remembered an old statistic that boomers (and older) were the fastest growing segment of Facebook users and wanted to see if that still held up.  While the post didn’t specifically answer what I was looking for, the stats suggested that Instagram and WhatsApp usage among boomers is showing the highest growth. 

You can easily trace the reason for increased social media adoption by older adults. The younger generations started on Facebook so their parents and grandparents adopted the technology to see pictures and to interact with their kids.  My kids (13 and 15) never really started with Facebook, but live on Instagram and Snapchat – and yes, I followed them there too. Once the younger generations started the trends, the older generations followed.

I’ve always thought of myself as a tech early adopter.  Of all my friends, I had one of the first “car” phones.  My first portable cell phone was a Motorola DynaTAC. It was expensive and weighed a ton and could be used as a boat anchor today, but I thought it was cool.  But I also remember in the early to mid-2000s, as Blackberries started to take off, saying that I didn’t want people to be able to get ahold of me 24/7. Of course, now I wouldn’t be caught dead without my iPhone in my pocket.  It was my younger coworkers that pushed/persuaded me into the change.  Constant connection was a way of life for them, so it became my way too.  Eventually, both my parents and my wife’s parents started using smartphone technology too.  

Seems that the parents are following the kids, again.

How does this tie to fees?

Look at the evolving advice and planning business today.  Vanguard is launching a robo-advisor that charges 15 basis points (bps) in addition to their existing Personal Advisor Services®  at about 30 bps.  Schwab’s intelligent portfolio makes its money on internal expense ratios, an expensive money market and order flow.  Those firms, alongside other robos like Betterment, are all targeting the younger demographic – users who are comfortable with technology and looking for inexpensive advice models.  When you also consider the almost 1,000-advisor-strong XY Planning Network, with many of their advisors using flat fees for service, you start to see the trend.  Younger clients are being exposed to alternatives to the AUM model.  Younger clients are being told that:

  • Basic advice is not expensive (especially investment advice).
  • Flat fees and retainers are an option that should be considered.
  • Fees are posted out there on webpages.  Fee transparency is expected.

My bet is that once alternative pricing becomes the norm for those younger clients and the robos/virtual advisors get more scale, the natural progression will again move up the age scale. Just as with technology and social media, the younger generations will start accepting alternative fee schedules, and soon the older generations will become the fastest growing segment.

Be prepared

I am by no means suggesting that advisors cut their fees to 30 bps or switch their entire book to retainer today.  What I am suggesting is that advisors need to be prepared. I believe there is a premium for customized advice, but you need to know what to say to the prospect who can see the value of planning but not for an all-encompassing AUM fee.  What do you say the children of your best client who will end up inheriting a large estate but don’t see why they should pay basis points?  You can get prepared by:

  1. Segmenting your clients.  Look beyond age or assets to segments based on need or complexity. Create personas to identify what type of planning and what type of fees would work best in each situation.
  2. Strengthen your value proposition.  If “basic planning” is set at 30 bps, you must decide what you can offer that will allow you to charge a premium. Personalized advice, specialized services and focusing on a niche are a great start.
  3. Explore technology that increases your efficiency. Workflows, automation and integration allow you to increase your offering while reducing expenses.
  4. Prepare your firm for alternative pricing.  What does it cost you to work with a client? Do you charge up-front planning fees?  What does your fee “menu” look like and can it be profitable?

The AUM fee discussion is not going away.  If you think it is a non-issue for your firm, wait until the next downturn in the market when clients are questioning fees alongside negative market performance.  While the robos/virtual advisors are training their clients, your clients will be following their kids to alternative fee schedules.

Investing involves risk including possible loss of principal.


Join the Practically Speaking community

We're your go-to source for tips on how to better manage your advisory business.


I understand SEI may send future emails to me, even if I opted-out before, and that I can opt-out again later.
Photo of John Anderson

Legal Note

Information provided by Independent Advisor Solutions by SEI, a strategic business unit of SEI Investments Company. The content is for educational purposes only and is not meant to provide investment advice or as a guarantee of any specific outcome. While SEI welcomes comments, SEI is not responsible for, and does not endorse, the opinions, advice, or recommendations posted by third parties. The opinions expressed in comments are the view(s) of the commenter(s), and do not represent the views of SEI or its affiliates. SEI reserves the right to remove any content posted by users of this site in its sole discretion.