Skip to content

The Great Adaptation

recently engaged in a three-way email conversation with Matthew Jackson of Dialektic Consulting ( and Brent Weiss of Facet Wealth (, which explored some issues that we all believe are important for the future of everybody in the financial services sector.

The conversation centered around fee structures; specifically, a slow but growing trend where younger advisors are moving away from an assets under management (AUM) fee toward a quarterly flat fee model.  My recent survey showed that a significant number of larger, more established firms are also introducing the flat fee structure to accommodate clients who have cash flow but have not (yet) built wealth.  (In other words, their clients of the future.)

I’ve predicted that in the next 10-20 years, most advisory firms will have abandoned the AUM model.  Weiss’s firm charges via flat fees, so he’s not worried that this trend will affect his operation.  But bigger picture, he wonders, wouldn’t this shift undermine the valuation of advisory firms generally?  The AUM model creates predictable and growing revenue streams in the future, which are attractive to prospective buyers—including successors, venture capital firms, strategic purchasers and rollover firms.  Buyers might be less willing to pay the same prices for the less certain future cash flows that would come from a flat fee arrangement.

Bigger picture, Weiss wonders whether advisory firms of the future would be able to demonstrate their financial planning-related value sufficiently to charge enough in flat fees to maintain their current levels of profitability.  Or would the alternative model and shift from AUM end the high (25% or more) margins that most of today’s advisory firms are enjoying?

Jackson’s response is that many advisory firms will have no trouble demonstrating their value and its link with the fees they charge.  Indeed, there are firms that offer MORE value than they’re charging for, for a significant number of clients, because the AUM pricing model is ‘convention-based’ rather than ‘value-based.’  He and I have noted elsewhere that, if advisory firms were to do a detailed cost-of-delivery analysis vs. what they are receiving from their ‘B’ and ‘C’ clients, they would discover that the majority of them are unprofitable.  A careful switch to flat fees would address that issue to their benefit.

But Jackson also expects that there will be a number of victims from any shift from AUM to flat retainer fees: those firms who make the shift without doing the necessary groundwork of articulating and (maybe more important) systematizing their value proposition.  (This systematization, and the introduction and communication of different service models, and their real-world value, happens to be his consulting specialty for planning firms in the U.S. and abroad.)

Weiss is still worried.  Yes, he says, there will be some advisory firms who will be able to show their value, and therefore charge fees that reflect their costs plus appropriate profit margins.  But what about the value of their businesses?  The end of AUM means the end of automatic fee increases as the market goes up, and also the end of fee invisibility for planning clients.  A future client, who sees the fees more clearly, might present a less “sticky” relationship, meaning that the profession will experience more client turnover than the current 99% (or so) retention rate and also see some competitive pressure on fees.

But aren’t we seeing excesses right under our noses?  Right now, we are in a market where venture capital firms and rollups feel like they can invest in advisory firms, take a share of the profits, and still not impact the bottom line income of the firm founders.  Almost every firm—even those whose value proposition is managing client assets in an increasingly commoditized marketplace—is participating in this rampant prosperity, and my fee survey shows that very few are feeling any margin squeeze.  How could that continue under a different (non-AUM) pricing model?

It can’t.  My own contribution to the discussion is that as advisory firms shift their revenue model, they will also, at the same time, begin to shift their business model. 

How can the owners of today’s advisory firms maintain their income while their firms lower their overall profit margins?  By raising their staff leverage.

Meaning?  If you look at the larger law and accounting firms, you basically see the planning profession’s model of the future.  Law and accounting firms have younger staff members who work really hard in their early years to achieve an invitation to become partners.  In those other fields—and in the future, in financial planning—only a small handful will get there.  For the partners, these partnerships will be just as valuable as the existing advisory firms, because the staff leverage will be the key to making up the difference.

Those advisors who do not become partners in their current firm will go out and start their own niche/specialized firms, and if they provide good value to their clients, they will do very well.  Some of them may create larger partnerships, but most will make a good living.  However they—and the larger partnerships—will not generate the kind of excess profits that attract venture capital investment.

When I see venture players moving into the independent planning space, and rollups whose executives made salaries their acquired advisors can only dream of, I know that there is an inefficiency in the current planning marketplace.  My forecast is that the inefficiency will come to an end—both with the shift in pricing models, and as the financial planning consumer of the future gets smarter about what and how to pay for the services of a planner in a competitive marketplace.  We’re already seeing that savviness in younger consumers of financial planning services—who are, last time I checked, the mainstream planning clients of the future.