Question on investment fees

Water Cooler
#1

Asking for myself here. As you all know, I’m still in the process of trying to “refine” my practice, which is a full-service tax, personal financial planning, and investment advisory shop.

Over the past year, there’s been a lot going on, and lot of reiterations to the way I price things. Most recently, I found out that I’m not allowed to “package” together investment fees and financial planning or tax. (Don’t know if this is a B-D rule, a FINRA rule, an SEC rule, or just an OSJ rule. Not that it matters.) And to be honest, I like the idea of decoupling the investment fees and charging separately for planning, because it properly incentivizes me to come in and work on non-investment-related stuff.

So I’ve started telling people that I charge ~$195/hour, regardless of whether it’s tax or financial planning. Investment fees are separate, and they ONLY pay for the implementation and ongoing management of your investment accounts. Everything else is billed on an hourly basis.

So here’s my question–knowing that you’re getting billed hourly for any “advice”, what seems like a reasonable investment management fee? Which one do you think will tickle a prospect’s ears?
A - 1% fee.* Period. End of discussion.
B - 1% fee, but if you’re less than $1m, there’s a “small account surcharge” of 0.5%.
C - 1.5% fee for accounts less than $1m, 1% for accounts greater than $1m.
D - 1.5% fee, but a 0.5% discount for accounts greater than $1m.
(Note that options B, C, and D are all the same thing–they’re just phrased differently.)

Here’s my question: which one of these would you pick, and why? Option A rolls off the tongue easily. It’s easy to calculate, and has the ultimate simplicity. However, it’s hard to make money on small accounts at 1%.* I’ll make more money on options B, C, & D, but it’s more complex and harder to explain to clients, which might turn them off.

Any suggestions are certainly welcome.

.
*That 1% (or 1.5%) is “all-in” pricing. It includes the program fee, the platform fee, the trading fee, the technology fee, the strategy fee, the “IRA maintenance fee”, the “document delivery” fee, and all the other garbage fees you can think of. So 1% is 1%. You will not pay more than 1%. You pay me 1%, and I pay all the garbage fees. So at 1%, my comp (after all garbage fees) starts at 0.5% on the low end, and maxes out at 0.7% for $1m+ accounts. The extra half-point will increase my comp by ~$4k per million, per year. (But only on the first million.)

#2

I like C. Most people understand that you get a better deal for bigger account balances.

#3

laddering fees make more sense to me. a larger account should be charged less bps.
maybe 1.5% for first 500k
1% between 500k to 1m.
0.75% for above 1m.
a 10m account will not want to pay above 1%.

#4

^Yeah, I thought about that. And that’s easy for my B-D to calculate. It just adds complexity to an already nebulous subject. And more complexity leads to more confusion for the clients, which leads to more no’s and less yes’s.

Side note - S2000 and Sweep - what is the plural of “yes” and “no”?

#5

Haha I was going to say.

I like option D the best. Wealthier people have a better understanding about how much fees eat into your investments’ bottom line. Having that word “discount” in there has a positive connotation, while “surcharge” has a negative connotation and option C is just plain neutral.

#6

D.

People like discounts. Look at JCPenney’s results after the marketing change from constant “sales” to “everyday low prices.”

The folks with less than 1m may not be enthralled with that wording, but I suspect they aren’t your target clientele anyway.

#7

ok. Give them the D.

1 Like
#8

#9

OK, then here’s the next question:
If I charge 1.5% for “small” accounts, and 1% for “regular” accounts, then my fee schedule isn’t particularly different from what you’ll get at Morgan Merrill Jones. And Morgan Merrill Jones will do all my financial planning for free!!! What, then, is the compelling reason to switch from Morgan Merrill Jones to Greenman72?

(We all know that MMJ isn’t doing financial planning. They can’t plan their way out of a wet paper bag. But clients don’t know that. They think MMJ is doing everything in the world for them.)

At a flat 1%, I don’t really have this problem. But once my fees start approaching that of the wirehouses, people are going to expect me to “provide financial planning for free, just like MMJ does.” How do you respond to that? Does that make you think differently?

And to Nerdy–yes, somebody with $10m in investable assets will probably get a different fee schedule. Once I land that client, I’ll probably negotiate a flat fee with them at somewhere less than 1%. But I doubt that fee kicks in anywhere less than $5m total.

#10

you can always fire clients with small accounts.

#11

Show them the difference in the services provided. Get your wife or someone to get a free “plan” from MMJ and work up your own theoretical John Doe plan. Highlight the key differences where your service is better on your marketing materials and have a thorough comparison on your website so the detail-oriented small business owners can dive into it at their own convenience.

Yes, people want to think they’re getting a discount. But they’re also willing to pay more for perceived quality. They may believe that MMJ is high quality because of name recognition / streamlined processes / their 2nd cousin with $50k in assets swears by MMJ. Your goal is to show them why your service is superior. In that vein, it may not be a bad idea to hit up a marketing consultant to really shore up your marketing materials.

#12

This is literally disclosed on all RIA’s ADV 2As. Go look at some and pick a fee schedule you like. Be sure to leave room for negotiation as big clients may want tailored services and you want big clients.

#13

^ except that it’s not. A lot of them say “negotiable, up to 2.25%” or something extremely ambiguous.

#14

Ummmm, that is because it is negotiable and they don’t want to leave money on the table. Anyway, just from google below are firms in Midland for some competitive analysis. It is a good idea to assess the competitive landscape before choosing a fee level arbitrarily.

Cargile, starting on Page 5: https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=663866

Raymond James, starting on Page 15: https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=661460

#15

Also, the phrasing in all of the options you listed, with the exception of option A, is either nonsensical or misleading. I assume a $2M account would pay 1.5% on the first $1M and then 1% on the next $1M? That would make sense. What doesn’t make sense is a $999k account paying 1.5% and a $1.01M account paying 1%…

#16

I get your point. And I could make it a “blended” fee, rather than a “tiered” one. But that’s harder for clients to understand.

I think I just came up with a solution: Since I’m a registered rep, and I still have good ol’ A-shares available to me, anybody with less than $500k to manage just goes into A-shares at American Funds. I can open a direct-to-fund account, and the clients can contact American Funds directly if they need any account maintenance. Or they can engage my office at hourly rates. Hopefully, this will push them to American Funds for all the “back office” stuff that I don’t want to deal with, which frees up my time to do more important things.

I did the math, and for a $250k account, it will take seven years to “break even”. That is, with A-shares, you get a nice up-front commission (starting at 5.75%) and a 0.25% trail. After seven years, the client will have paid $10,500 to me either way. (Same thing with $500k account–it takes four years to break even.)

Of course, for accounts north of $500k, an advisory account is worthwhile to both me and the client, even at 1%. That keeps me competitive with the competition.

And to be honest–I don’t want to charge more than them, because my investment philosophy is very Vanguard-ish in nature, so charging more than that would be contrary to my message. Plus, it’s hard to send $195/hour invoices when you’re charging 2%. Clients will think “Why am I paying an hourly charge to Greenman when Merrill Lynch does the same stuff without all the hourly bills?” (Which we all know is horsesh!t. But it’s not about what we know. It’s about what the client believes is true.)

#17

Thanks for helping me help myself, Brain. You’re just what I needed!