Benchmarking the Beach House

As an industry, we’ve made great strides over the years towards aligning compensation with client interests – steadily migrating from transaction-based to fee-based models. With the implementation date for the DOL Fiduciary Rule looming on the horizon, that pendulum will continue to swing even further. However, are asset-based fees truly the BEST approach to compensation?

Although more representative of the client’s best interest, asset-based fees are still investment-based rather than goals-based. For most advisors, nearly all of their compensation solely predicated on the amount of portfolio assets they manage rather than how much work they do with the client on setting goals, creating and managing financial and/or estate plans, or other important value-add services.

Aligning your fees with your value-add

When I worked at Alliance-Bernstein, our goal was to always approach every client relationship from a goals-based planning perspective. Instead of just gathering whatever assets we could and putting them in a portfolio benchmarked to a certain index, we called our approach “benchmarking the beach house.” If a client’s principal goal was to save enough to buy a retirement beach house then we would craft a comprehensive plan designed specifically to achieve that goal. We’d then go down the list and build similar plans against each of the clients other important goals.

Ultimately, this is where the essence of a strong client-advisor relationship is derived. It’s the guidance you provide around designing your clients’ futures and how their personal wealth can be structured to help them achieve various specific goals. Working together in this manner, you and the client become co-authors and co-creators of their financial future – a marriage of your professional expertise and insight with their dreams and passion. That’s where your value-add is the greatest, and by extension, where the majority of your fees should be generated.

Why don’t more advisors venture down the fee-for-service avenue? My guess is that despite the inherent logic and disability, many fear the uncertainty of a new compensation model. Will it be more complex to track? Will clients be more likely to pay attention to and question their quarterly fees this way as opposed to simply having them deducted by the custodian? Perhaps. But at the end of the day there’s no getting around the fact that asset-based fees are performance-based fees. As such, your relationships are far more likely to hinge on portfolio performance rather than all of the strategic planning value you bring to the table. And that is a very precarious position to be in as robo-advisors continue to garner greater market share.

Coaching Questions from this article:

1. Take some time to reflect on your current compensation model. How aligned is it with the best interest of your clients?

2. What compensation changes could you implement that would address the increasing mandate by both regulators and clients for greater transparency?

3. Think about ways you might explore your existing clients’ receptivity to various compensation structures (e.g., asset-based fees vs. hourly fees vs. annual retainers)? What questions could you ask and how could you use that information to align with client references?