Written by: Brian Beck and Daniel Friedman | WMGNA, LLC Tax-Out Financial Solutions™
If you have a practice with two partners or an “ensemble” practice with 5 to 10 advisors, charging a subscription on top of what’s being earned in AUM fees might be a tempting proposition. With 250 clients, an annual subscription of $5,000 to $10,000 for everything outside of managing assets is a direct route to an additional $1 million to $2.5 million in revenue.
In reality, it’s not going to work that way. Subscriptions can work for your practice, and more importantly, can work well for the clients, but only if they are developed and deployed in a customized manner for each client.
The process of assessing the right cost of subscriptions starts with three questions. First, what does this client need? Second, how much of what they need can be covered by the AUM fee? Third, the indelicate but, nonetheless, practical question: What do I want to earn from this relationship?
It’s notable to consider for a moment that the straight AUM pricing model does not take any of these questions into account. Its beauty is in its simplicity, yes, but its simplicity makes AUM fees a blunt instrument when considering that managing someone else’s wealth is a complex and nuanced relationship.
Calculating The Fees
We have charged subscriptions in addition to AUM fees for almost 30 years. The vast majority of our range is between $400 and $750 per month. Often, they are billed monthly, with some annually.
How did we get here? An example will help. Let’s take a common scenario. A retired couple with three children, two grandchildren, and more on the way.
We know from our work over the years that the couple needs their tax returns prepared and filed. We also know that they now have a growing interest in estate planning and want us to start providing guidance to their children but not take over the management of their assets. The couple has $2 million in assets and owns their home.
From this, we can deduce how much time we will need to allocate to estate planning. We can also assess how much time we will spend with the three children providing guidance to them, such as their asset allocation. We can also calculate how much time and attention will be required to set up trusts for the two grandchildren. Finally, because they have been long-term clients, we also know that we will assign their tax return to a preparer we have worked with and quarterback the process for resulting activities for things like estimating the next year’s quarterly estimates and what tax-deferred contributions should be made.
We also know that the $2 million in assets held by our clients will generate $15,000 to $20,000 in annual AUM fees. The subscription is simple then:
The total amount of time we will spend on this client times our hourly rate, plus our hard costs including third party asset managers, less the $20,000 in fees that will be earned from placing the assets under management. What we have found in our practice is that an additional $5,000 to $10,000 annually take a relationship from being profitable to being nicely profitable.
Not So Fast
The above example makes the calculation of subscription fees seem simple, but this simplicity rests with knowing some hard costs, and not all independent advisors have a good understanding of their hard costs at their fingertips.
In the above example, here are some of the hard costs that need to be known to assess the right subscription fee.
-
The hourly rate for principals’ time.
-
The billing rate for associates.
-
Hard costs for accounting and legal fees.
-
Hard costs for overhead such as occupancy, IT, and professional services.
-
Asset management fees that are charged to the advisor.
For better or worse, among independent advisors, such granularity is the exception, not the rule. For many, the assessment of how well they are doing comes once a year when their accountant sends them their K-1.
The takeaway here is that changing subscription fees require that advisors sharpen their pencils. This is a lot of work. But drawing another $1 million from a small independent practice should take work for your sake and the sake of your clients.
Backward Application
Truthfully, for practices that are well established, the decision to apply subscription to a client base that has been sustained by AUM fees is awkward and perhaps ill-advised. The reason is that most relationships are premised on asset management and the resulting fees. In the client’s mind, these are the fees that define the relationship.
This means the successful transition into subscription requires re-assessing each relationship in the practices based on needs outside of asset management,
-
Assessing the complete set of services a client needs and is willing to accept from you
-
Determining the costs you will bear providing these services
-
Establishing what you want to earn from the relationship
-
Adjusting the AUM fees so that they are properly calibrated to how much asset management figures into the complete menu of services.
This is not uncomplicated, and it is time-consuming. For this reason, the successful application of subscriptions might reasonably be achieved with new clients (subscribers) as they are acquired rather than applying it to a client base retroactively.
Think about it. When a new client is ready to do business with you, this is the moment in time they want to discuss all of their goals and this is the opportunity to show them all of the services they need such as tax approximation, cashflow analysis, employee benefits analysis, And this is the moment to show them what it will cost, purely on a subscription basis, because they can understand and accept the value of these services outside of straight asset management.
This approach moves asset management to the side for an important moment and enables the advisor and the client to establish the holistic value of the relationship. If and when assets are bought into the practice, the AUM fees can be established at that time and at a level that accurately reflects their place in the overall menu of services that are being provided.
For practices that are growing, a “moving forward” approach is best. For those practices that are stable and not seeking new clients per se, establishing subscription fees across their client base is viable, but it takes time and needs to be done with extreme care.
Related: Risk Isn’t the Enemy Anymore—And Your Clients Know It