An example of how RIAs can convert from an AUM fee model to a Retainer fee model

This post was created in response to a question that was asked in a Facebook group for financial planners:

Question: I have a typical financial planning practice where I have 200 clients who have money invested through me. 95% recurring revenue. I typically charge 1%. I am looking however at moving to a small AUM fee and then a fee for service for those who have their money with me. How do I successfully make the transition from a typical 1% AUM fee to fee for service? My rationale for doing this is to be more transparent and also to be able to help those who don’t have AUM yet.

How KnowCap for Advisors would structure this new fee model…

Take your average AUM amount charged to your current clients. Make that number your crossover threshold (the amount where you say that at $X aum, your financial planning fees are offset) at your new AUM fee.

Then you should reverse-engineer your new financial planning fee so that you are well-compensated for the time you work with new clients.

For example: Let’s say with an average revenue of $10,000, at 1% your average AUM is $1,000,000. Also, let’s assume that in the future, you lower your fee AUM fee schedule to 0.65%. To sustain the $10,000 average revenue model, you need approximately $1.5M.

Therefore $1.5M in assets is the number you set as the crossover threshold.

Assuming that 1% of AUM is currently priced correctly, you could reverse-engineer your planning fee to become $3,500 (you should absolutely charge more than this for high-end planning!!!).

That would make a firm “whole” where your previous clients would still be at the $10,000 fee, your revenue would remain the same (assuming there is no client churn from the announcement), and you have room for growth by allowing prospect with zero AUM sign on as clients as well.