The financial advisory industry is undergoing a significant transformation. Traditional compensation models, often rooted in product sales, are being replaced by approaches that align more closely with the needs and values of modern clients. Todd Fithian, co-founder of The Legacy Companies, offers insights into how advisors can shift their business models to better serve clients and ensure long-term success. Here, we explore the three dominant compensation models in financial advisory services and why the recurring fee model is the future of the profession.
1. The Traditional Model: Giving the Plan Away
Historically, many financial advisors have used the plan to sell products such as insurance or investment vehicles. This approach, while common, creates challenges for both advisors and clients. Advisors who don’t charge for planning are often seen as product salespeople, which can diminish the value of their advice. This model is “old-school thinking,” and it lacks the objectivity clients are increasingly seeking. By giving away planning for free, advisors are effectively undermining the very wisdom, knowledge, and strategic insight they bring to the table.
Statistics on the Impact of Product-Driven Models:
- A study by Kitces.com found that advisors who rely on commissions and product sales for compensation often face client skepticism about the objectivity of their recommendations.
- 84% of consumers prefer working with advisors who operate under a fee-for-service model, as it reassures them that the advice they receive is unbiased and not tied to product sales.
Our advice is clear: move away from this model. Clients need to see the value in the advice, not just the products.
2. One-Time Fee Model: Better, But Not the Solution
The one-time fee model, popular in the CFP community and among many advisors, involves charging an upfront fee for a financial plan. Afterward, advisors typically revert to traditional compensation methods tied to assets under management or insurance sales. While this is an improvement over the first model, it still falls short of what we see as a sustainable long-term strategy.
The main issue with this approach is that clients may begin to view the advisor as a product seller, not as a trusted resource for ongoing advice. “This model leaves dollars on the table for the advisor’s business,” Todd explains, “and over time, it destroys the objectives that were created at the start of the relationship.”
Why One-Time Fees Fall Short:
- Clients can start to question the value of the relationship once they see the advisor primarily as someone managing assets rather than providing ongoing advice.
- 72% of clients reported in a Cerulli Associates survey that they are more likely to trust advisors who separate financial planning fees from product sales.
We believe this model does not position the advisor as the client’s most trusted resource and can limit opportunities for deeper, ongoing engagement.
3. The Future: Recurring Fees for Continuous Advice
We advocate for a recurring fee model, which charges clients for ongoing advice rather than tying compensation to products. This model aligns better with what modern clients want: objective, strategic advice that is not influenced by product sales.
“More and more clients crave the objectivity of the plan and advice provided, and they want to know that when advisors recommend things, it’s because it’s in the client’s best interest—not because the advisor needs to sell something to be successful,” Todd says.
This model not only fosters long-term trust but also protects advisors against fee compression, a growing challenge in the industry. As the market becomes more competitive and robo-advisors put downward pressure on AUM fees, advisors without a robust fee-for-advice model risk losing revenue. Moreover, the continuous fees for advice lend the objectivity for the advisor to be able to recommend traditional products and services, where they can be compensated for those services as well.
Statistics Supporting the Recurring Fee Model:
- 76% of advisors who transitioned to a recurring fee model reported higher client satisfaction and retention.
- Research by Cerulli Associates shows that the use of retainer-based fee models grew by 19% from 2019 to 2023, signaling a shift in how advisors charge for services.
Advisors who successfully implement this model build relationships that are based on trust and advice, not transactions. Early adopters of this model often reduced fees after the first year, but in recent years, advisors have kept fees consistent as clients recognize the ongoing value they receive.
A Hybrid Model: Balancing Fees with Product Compensation
Some advisors are experimenting with hybrid models that blend fee-based planning with product compensation. For example, a client might pay a $7,000 advisory fee and an additional $3,000 in product-related fees. While this approach can be appealing, it risks diluting the objectivity of the advisor.
“This model puts too much emphasis on clients as a price tag,” Todd warns. “It lessens the objectivity of the advisor and can feel penalizing to the client.”
The True Value: The Advisor, Not the Plan
The real value clients receive isn’t just the financial plan itself—it’s the advice and guidance that come with it. Clients rarely read through an entire plan document, but they place immense value on the advisor’s ability to offer sound, strategic counsel.
We’ve long advocated for a client-centered approach that emphasizes vision, values, and goals. This philosophy underpins our view on fee models: advisors should position themselves as indispensable resources for their clients, guiding them through complex financial decisions and life events. This deeper relationship cannot be built on a model that is tied to products alone.
Conclusion
The financial advisory landscape is changing rapidly, and advisors who fail to adapt risk being left behind. By moving away from product-driven compensation and embracing a recurring fee model, advisors can provide the objectivity and ongoing advice that clients are increasingly demanding. Leadership is about being willing to go where others won’t. Advisors who take this bold step will find themselves not only more competitive but also more valued by their clients.
Sources:
- Kitces.com, 2023 Advisor Compensation Study
- Cerulli Associates, Consumer Preferences for Advisor Compensation
- Cerulli Associates, Trust in Financial Advisors Survey
- Kitces.com, Survey on Recurring Fee Model Adoption
- Cerulli Associates, Trends in Financial Planning Fees Report
