Recent years have seen an increase in the number of RIAs charging fixed monthly retainer fees, and while retainer fees can have several advantages over other types of fees, one notable disadvantage – particularly as compared to traditional AUM fees, which tend to increase automatically in line with financial markets – is that financial advisors who use them must proactively raise their fees from time to time in order to keep up with business expenses, invest in new upgrades, and increase their own take-home income. The necessity of fee increases entails a certain amount of pain for monthly-fee advisors since each conversation around raising fees creates the possibility of pushback from clients that could put a strain on the client-advisor relationship.
This is all the more true when clients are dealing with cost increases in other areas from high inflation, yet the reality is that many advisors are also facing inflation in the form of higher business costs. As a result, monthly-fee advisors may see a decrease in their take-home income if they don’t increase their fees at least enough to keep up with their rising business expenses.
But using business costs alone as a justification to raise fees can backfire on the advisor. For one thing, it limits the amount that an advisor can raise their fees to roughly the rate of inflation in their business expenses, which translates into no net increase in take-home income. And even more importantly, higher business costs as a rationale for raising fees is bound to ring hollow with clients since they are likely to care much less about the advisory firm’s expenses than about the fact that they will be paying a higher fee going forward, 'just' to receive the same level of service they were already getting.
A better way to implement and communicate fee increases may be one that is centered around providing more value to the client in exchange for the higher fee. To start, this signifies a client-centric approach, shifting the basis of the increase from the advisory firm and its needs (to maintain its profit margins with higher business costs) to the client and what the fee increase means to them. Furthermore, it increases the potential for the amount that the advisor can increase their fees since clients are more likely to accept a higher increase when there is clearly something in it for them as well!
When communicating fee increases to clients, then, it’s important to be concrete and confident about how the advisor will bring extra value to the relationship (which, of course, means having a plan to deliver that value in the first place). Because, while any conversation around fees comes with the possibility of client pushback, that extra value represents a powerful argument for why it's in the client’s best interest to go along with the change – and if the client ultimately decides they don’t want to accept the higher fee and ends the relationship, it creates a new opportunity to add clients who do see the value in the higher fee.
Ultimately, nearly every advisory firm that charges monthly fees will eventually need to raise those fees to at least maintain a steady take-home income. But advisors who want to grow their income beyond ‘just’ the rate of inflation in their business cost can do so by stepping up their value to their clients – whether in the form of more services, better technology, or just greater experience and expertise allowing them to go deeper into planning!
The Growing Popularity (And Challenges) Of Flat-Fee Revenue Models
Of the various ways that advisory firms can charge fees for their services, the most common in use is still the basis-point Assets Under Management (AUM) model. For example, in the latest Kitces Research on How Financial Planners Actually Do Financial Planning, 82% of firms used AUM as their primary way of charging for advice. However, recent years have seen an increase in the use of flat-fee models, including monthly subscription or retainer fees, hourly fees, and one-time project-style plan fees. Collectively, these methods have grown in their use over the years, from around 6% in 2018 and 2020 to 15% in 2022.
Flat-Fee Revenue May Offer More Stability But Doesn’t Provide Built-In Inflation Protection
Flat-fee models can have several advantages over the traditional AUM fee structure. For clients, flat fees are generally more transparent and predictable: The client knows exactly how many dollars they will be paying for financial planning upfront, whereas, with AUM, the actual dollar amount will shift from quarter to quarter in step with the balance of the client’s investment accounts. Additionally, when the advisor’s focus is on holistic financial planning and not ‘just’ investment management, flat fees tend to be easier to connect to that value proposition rather than a fee model that is tied to the client’s investable assets.
For advisors, flat-fee billing also creates more predictability in cash flow and can offer protection against market declines that would otherwise lead to a drop in assets under management and to AUM-based fees in turn.
However, the flip side of the relative stability of flat-fee advice models compared to AUM is that flat-fee advisors don’t benefit from higher fees when markets rise. And because markets generally rise more than they fall, AUM advisors are usually able to enjoy steady (albeit unpredictable) fee increases over time, giving them a built-in source of revenue growth to help them offset inflation and rising business costs (and often provide advisors with raises – and firm owners with increased profits – on top of that).
Flat-fee advisors, in contrast, don’t have any such revenue growth baked into their business model. They charge a fixed amount per unit ‘sold’ (e.g., a retainer slot, a billable hour, or a project-style plan), which means that the only ways to earn more fee revenue are to:
- Increase the number of units sold (e.g., retainer slots, hours, or plans); or
- Increase the amount charged per unit.
Firms in their early stages of growth might have the ability to add units in the form of more clients, hours, or plans charged for. But there is a limit to how much firms can simply continue to add on billable units until they reach the limit of how many clients they can serve effectively. At that point, in order to add any more revenue, they’ll need to either add additional capacity to serve clients (e.g., by hiring advisors or support staff) or take the step of increasing their fees.
The upshot of all this is that flat-fee advisors who aren’t interested in growing by hiring will inevitably need to raise their fees at some point – otherwise, with the amount of revenue the advisor can possibly earn capped at their client capacity, inflation and rising business costs will combine to eat away at the advisor’s take-home income over time.
Why Conversations Around Fee Increases Are So Difficult
But raising fees by itself isn’t the hardest part. It’s communicating the fee increase to clients that is the sticking point for many advisors. This is one of the biggest differences between the AUM and flat-fee models: AUM advisors raise their fees (in dollar terms) any time markets increase or clients add funds to their advisor-managed accounts – but they never need to tell clients about those fee increases, because they’re simply built into the percentage-based fee schedule. Whereas any time flat-fee advisors raise their fees, they do need to tell their clients (along with updating their advisory agreements, Form ADV, marketing materials, etc.).
Is this fair? Nope! SEC and state securities regulations give an inherent advantage to AUM-based advisors, who only need to communicate fee increases to their clients when the percentage of assets used to calculate the fee increases. Furthermore, regulators don’t always allow flat-fee advisors to include automatic fee escalator clauses in their advisory agreements – that is, to state that their fees will increase by a set amount each year without requiring any further consent from the client, which would otherwise allow flat-fee advisors to automate their fee increases and avoid the need for a conversation around it each time. And so, while AUM advisors are effectively allowed to automatically raise fees every time client assets increase, flat-fee advisors are usually required to notify their clients – and get the client’s sign-off – for every single fee increase.
Why this all matters is that no one enjoys having the fee increase conversation, and the need to proactively inform clients of any increases likely holds back many flat-fee advisors from increasing their fees frequently enough (or at all), causing them to lag behind AUM advisors in take-home revenue. In the 2023 Kitces Research data (unpublished), the median AUM firm earned $5,963 in revenue per client, while retainer firms earned only $3,515. Although other factors likely added to the discrepancy (e.g., differences in client assets and planning needs across revenue models), the fact that AUM fees can grow automatically while flat fees must grow intentionally is doubtless a contributing factor.
Advisors tend to be motivated by the desire to help their clients and, as fiduciaries, are required to act in their clients’ best interests. Sometimes the feeling of a duty of loyalty can be so strong that it feels unpleasant or even contradictory to the advisor’s entire role to state that they’ll be charging a higher fee for their advice. But the need for more revenue – if only to keep up with rising business costs and inflation in the advisor’s personal expenses, not to mention raising their income in real terms – makes it necessary to eat the frog and raise fees from time to time.
In raising fees, flat-fee advisors face a tradeoff between making more frequent (but smaller) increases and less frequent (but bigger) increases. It might be easier for clients to absorb a smaller fee increase than a bigger one, but smaller increases also need to be revisited more often in order to keep up. This increased salience of advisory fees – that is, the greater awareness clients have of their fees because of the need to discuss them frequently – makes it challenging to stick to a disciplined schedule of fee increases. However, the longer the advisor waits to take action, the greater the fee increase they will likely need to make – which, of course, makes the necessary conversation with the client even more difficult and thereby even more tempting to put off, and so on.
In other words, achieving a desired level of fee growth involves making a decision of where to fall along the line between frequent, small increases and infrequent, large increases. The smaller each incremental fee increase gets, the more frequently fees will need to be raised to maintain an equivalent growth rate.
In other words, flat-fee advisors face a similar level of ‘pain’ in communicating fee increases no matter the size of the increase. It helps, then, to have ways to make any conversation around fee increases easier so that, regardless of the size or frequency, advisors can confidently raise their fees and communicate those changes to their clients.
A Value-Based Approach Towards Raising Fees Helps Clients Understand How They Will Benefit
One way that firms across many industries explain the need to raise fees is to point out that business costs have gone up, requiring the company to raise prices in turn. From the business owner’s end, this might seem like a sensible explanation. For one thing, it’s easy for customers to understand – people can generally grasp that companies need to sell their goods and services for more than they cost to produce in order to survive. And for another, it absolves the business owner of the decision to raise prices on their customers: Because other companies that the business buys goods and services from decided to raise their prices, it had no choice but to follow suit. It can be really tempting to explain the price increase in a way that downplays the business owner’s role in the decision.
While this might all seem very reasonable from the perspective of the business owner, for the client, none of that matters.
What does matter to the client is how much they are paying and what they are getting for it. And so, from the client’s perspective, it doesn’t matter what the business owner’s costs are – they only see that their own costs are going up. And crucially, when the business owner cites higher business costs as a reason for raising fees, the unstated message to the client is that they’ll be paying higher fees for the same level of service while getting nothing extra of value in return. In other words, the fee hike represents nothing but passing along extra costs in order to help the business maintain its profit margin.
Customers of a business have no moral obligation to protect a business and its profit margins, and even though many financial advisors create tight personal relationships with their clients, it is ultimately an arm’s-length business transaction. If a business raises its prices without giving its customers anything extra in return, those customers are free to take their business somewhere where they do feel that they’re getting more value for their money – and at some point, they will. A justification for raising fees that is solely centered around the business owner’s needs is bound to ring hollow.
That’s why a better approach to communicating (and implementing) fee increases is one that focuses on the additional value the client will get in return for the higher fee rather than on the business’ need to raise fees in line with higher costs.
“Value” is a highly used but often poorly defined term in the advisory world, but in this context, it means simply anything extra the client will get for the fees they pay. It could be extra services that the advisor provides. It could be deeper planning capabilities made possible by investing in more education or better technology. It could be enhanced client service or implementation tools that make it easier to follow through on the advisor’s recommendations. It could be any of those things and more. What’s important is to be clear that the client’s higher fee will be paying for something in return.
A Value-Based Fee Conversation Is More Client-Centric
One of the main reasons to take a value-based approach to fee increases is that it puts the client at the center of the conversation. Advisors often pride themselves in taking a client-centric approach to financial planning: They prioritize deeply exploring the client’s goals and needs before coming up with strategies to address them. And although the advisor may provide ideas and solutions, it is essential for the client to see how those solutions will improve their own financial situation to be motivated to take action.
Why should the conversation around fees be any different? Just as centering the financial planning conversation around what’s important to the client can get them motivated (even excited) to take action, centering the fee conversation around what that means for the client… well, it may not excite them about paying more, but it at least lays out how the fee increase might ultimately benefit them (and could even pique their curiosity and interest to see what is in store for them).
Consider the following statement around raising fees:
We will be raising our fees in the coming year. Though it was a difficult decision for us, recent increases in our business costs made it necessary to ensure the financial stability of our business going forward.
The statement contains a perfectly reasonable rationale for raising fees, and anyone reading it would likely be sympathetic to the fact that higher business costs require higher prices in order to keep up. However, notice that there is nothing – not one word – about the client in that statement. It’s all about we, our, and us – the firm.
Even if the client were willing to go along with the fee increase, they wouldn’t likely do so with feelings of excitement or goodwill towards the firm.
Let’s try again:
We will be raising our fees in the coming year. Given the inflation we’ve seen over the past year, we understand that this likely represents one cost increase out of many for you, but the change will allow us to invest in improvements that will hopefully create a better and more valuable client experience for you.
Both statements start with the same basic fact that fees will be going up, but whereas the first statement was all about the decision to raise fees from the firm’s own perspective, the second statement clearly elaborates that the fee increase means something for the client going forward.
Ideally, the conversation would continue by discussing specific improvements the firm will be investing in and how they will enhance the client experience – but simply leading with the fact that there will be improvements at all helps to set the idea in the client’s mind that there is something in it for them, too.
The Higher Upside Of Value-Based Fee Increase Conversations
One more reason to base fee increases around providing additional value to clients rather than adjusting for higher business costs is that it raises the ceiling for how much the advisor can justifiably increase their fees. This is because, while there is only a certain amount that business costs can be expected to increase from year to year, there are many ways that an advisor can find to provide additional value to clients, each of which can justify a higher fee if they are valuable enough to the client.
In this way, the conversation around fee increases is a lot like the initial conversation around fees that advisors have with prospective clients. In that discussion, the key to confidently quoting (and sticking to) a fee amount is to demonstrate the value that the client will realize from the advisor’s services, focusing on how those services will help solve the client’s specific problems and move them toward a better future. At that point, the client’s decision to go forward or not can be framed around the question of “Is this fee worth it to solve my problem?” rather than “Is this advisor more or less expensive than the other ones I’ve talked to?”.
The only difference in the case of the fee increase conversation with an existing client is that it’s the additional value that the client will be getting, rather than the total value, that the advisor can emphasize. And just like the initial fee conversation with a prospect, leading the fee-increase conversation this way frames value as the key point, making the extra cost a secondary concern for the client – and if the advisor can demonstrate the value clearly, it will be easy for the client to see how the extra fee will be worth it.
How To Have A Value-Based Fee Increase Conversation
The decision to raise fees starts well before the conversation with the client about it. This is particularly so with a value-based fee increase, which requires deciding how the advisor will actually provide the extra value to begin with, then planning on how to communicate and implement those changes.
In other words, the first question advisors can ask themselves when planning to increase their fees can be: “How will I be upgrading the value I provide in order to justify the higher fee?”
What’s important to remember is that clearly demonstrating the additional value that clients will be getting for their higher fee requires coming up with concrete ways to provide that value. Saying, “We’ll be providing some exciting new upgrades to the client experience!” won’t provide much excitement unless there are real details about what those upgrades will be. So there should be some specific upgrades – it could be 1 or 2 or a half dozen, though it’s important not to overpromise – that the advisor actually plans to carry out to make their services more valuable to clients.
A few of these value-adding strategies could include:
- Investing in technology to provide deeper planning capabilities
- Increasing the number of touchpoints with the client, either by providing more one-on-one meetings or sending more frequent updates, check-ins, and reminders
- Outsourcing client service tasks to allow the advisor to focus their expertise on financial planning (and potentially also create a smoother client service experience for clients)
- Creating educational content and events for clients to broaden their own knowledge and provide networking opportunities
- Focusing on a niche to hone expertise in a specific set of planning topics that will make the advisor more valuable to a particular type of client
Notably, many of these strategies may themselves increase costs for the firm, which advisors should take into account when deciding how much to actually raise their fees. But obviously, the goal is that the added value of the strategy for the client – and thus the amount the advisor can justifiably increase their fee for it – exceeds the investment that the advisor puts into it.
Deciding How To Communicate Fee Increases
After deciding how to provide additional value to clients and how much to charge for that additional value, the next step is communicating the fee increase with clients. Some advisors might prefer to do this face-to-face (either in person or on a phone or video call), while others might rather do so via email. Both approaches are valid, though there are tradeoffs to using each.
For example, communicating fee increases in a face-to-face meeting gives more opportunity for dialogue, where the client can ask questions and express their concerns. Some advisors also may feel it creates a more personal atmosphere for the discussion that will help soften the edge of the news about the fee increase.
Conversely, informing clients via email can ensure a more consistent message across all clients. It also can be more efficient than a face-to-face meeting since email makes it possible to inform clients about the fee increase all at once, rather than needing to schedule a call or meeting for each individual client. Finally, email ensures there is a written record of the advisor informing the client about the fee increase, along with the justification for doing so.
Regardless of the medium, the communication of the fee increase with clients should include the following 3 elements:
- The specifics of the fee change: the amount of the increase, the new total amount the client will be paying, and the date the change will be implemented;
- An opportunity for the client to ask questions or share concerns face-to-face with the advisor – in a face-to-face conversation, this may happen during the meeting itself, while an email should include an invitation to call or schedule a face-to-face meeting (or to include the topic on the agenda of the client’s next scheduled meeting); and
- A written summary of the fee changes for the advisor’s compliance records – this is already accomplished in an email, while a written summary can be sent as a follow-up after a face-to-face meeting.
For advisors who prefer to communicate the change in person, it may help to use a template script or outline to ensure all of the necessary information is given to each client consistently.
Example 1: Annie is an advisor who wants to provide a ‘higher-touch’ and more valuable experience to clients, which will be accompanied by raising her fees across her client base.
She would prefer not to inform clients via email, so instead, she calls each client to tell them about the change, basing each conversation around the following script:
“I’m calling today to let you know about some changes to our services and fees that will be coming up at the beginning of next year. I’ve listened to feedback over the years from clients like you on what would make our services more valuable, and I’ve decided to implement some changes that I think you will really find useful.
First, we’ll be starting to send out a regular monthly update email with a few key elements of your financial situation – things like changes to your net worth and cash flow over the previous month – so you can get some clarity into your finances without needing to wait until our annual meeting.
Second, we’ll be improving some of our processes on the back end that will help us step up the way we make, implement, and keep track of financial planning recommendations over time.
In order to make these improvements, we’re also making some changes to our fee structure. Your monthly planning fee will increase by $100 to $400/month starting on January 1 of next year.
I understand that, with the inflation over the last year, this is probably one of many cost increases for you. But I’m confident that you’ll find, with the upgrades to our services, what you’ll be getting will still be well worth the cost.
I’ll be sending this information in a follow-up email as well, but for now, do you have any questions about either the new services or the fee change?”
Of course, if the conversation is face-to-face instead of via phone, the advisor won’t actually have the script in front of them to read from, so it could be worth doing some role-playing of the conversation with other advisors or, at the very least, rehearsing the script out loud before doing the real thing with clients.
For advisors who would rather communicate the change via email, it’s easier to have a template that can then be duplicated across clients via copy-and-pasting or mail merge:
Example 2: Suppose that Annie from the example above would rather email the notification of the changes to her clients rather than phone each client individually. She sends the following email, personalized for each client’s name and fee level:
I’m writing to let you know about some changes to our services and fees that will be coming up at the beginning of next year.
There are 2 main changes that will happen in the new year:
- We’ll be making some upgrades to our services in order to create a better experience for our clients; and
- We’ll be increasing our fees by $100 per month.
Why we’re making this change:
I’ve listened to feedback over the years from clients like you on what would make our services more valuable, and I’ve decided to implement some changes that I think you’ll find really useful.
Among the upgrades we're planning for are:
- We’ll be starting to send out a regular monthly update email with a few key elements of your financial situation – things like changes to your net worth and cash flow over the previous month – so you can get some clarity into your finances without needing to wait until our annual meeting.
- Improving our processes on the back end to step up the way we make, implement, and keep track of our financial planning recommendations over time,
How your new fees will work:
Your monthly financial planning fee will be $400/month, starting January 1, 2023.
What to do next:
I invite you to book a time on my calendar if you have any questions or would like to discuss the changes we’ll be making.
I know this is likely one cost increase out of many for you these days, and I didn't take the decision to raise my fees lightly. But as you look back on how your own financial situation has progressed since you became a client, I hope you'll find that the new fees will still represent good value for addressing your current planning needs. In exchange, I'm ready to step up to expand on and deepen the value I bring to you going forward.
As always, feel free to reach out with any questions or concerns.
Dealing With Client Pushback From Raising Fees
For advisors raising their fees (and particularly those doing so for the first time), the biggest fear may be that clients will not agree with the increase. What if they’re angry? What if they ask to be grandfathered into the old fee structure? What if they refuse to pay and fire me on the spot?
Well… what if any of those things happened?
The first fear – that the client will be angry – might be the most potent for any advisor who highly values the quality of their client relationships. However, it’s probably also the least likely circumstance to occur. Consider first that advisors do spend so much attention on building deep client relationships; it’s hard to create that quality of relationship and not have a significant reserve of goodwill to draw on.
At the same time, it isn’t possible for an advisor to control a client’s emotional reaction to any piece of news, so if the client unexpectedly indicates feelings of anger, hurt, or betrayal, the best thing an advisor can do is to meet those feelings with empathy and give space for the client to cool down:
I’m hearing that you aren’t very happy about these changes. I understand where you’re coming from – there have been price increases everywhere lately – but I’m confident that with the improvements we’re making to our services, you’ll be more than getting your money’s worth.
That said, this will be our service model for all of our clients going forward, so if it isn’t something that’s acceptable to you, then we would need to part ways, which I would hate to see happen before you get a chance to see the new features we’re rolling out.
Would you like some time to think it over and decide whether this is something you want to go forward with?
For the second fear – that the client will try to negotiate out of the fee change – it’s important that the advisor has the confidence in the value of the upgrades they’ll be providing to stick with the fee increase as stated. This is why the advance work of figuring out ways to add extra value is key to having this conversation. If the advisor leads the discussion by articulating the extra value they will be providing, then they can respond to the client’s attempts to negotiate the fee down by re-emphasizing the added value rather than having to think on the spot for more ways to justify the fee increase:
I understand you’ve been a loyal client with us for a long time. But consider how your own financial picture has changed over that time. As your situation (as well as our other clients’) has gotten more complex, we’ve found ways to adapt our services to meet those needs. And so this change represents us stepping up our services to grow with our clients (like you) and make our advice even more valuable going forward!
The third fear – that clients would rather fire the advisor than go along with the higher fee – has 2 sides to it. On the one hand, no one necessarily wants to be fired, and if enough clients decide not to go forward, the decrease in revenue from lost clients might offset the added revenue that was supposed to result from raising fees to begin with. But on the other hand, losing some clients who don’t see the extra value in the advisor’s services (and who consequently may have been less communicative and less motivated to follow the advisor’s recommendations) represents an opportunity to add clients who do see that value, and are willing to pay the new, higher fee.
Advisors who raise their fees should not only expect to see some client attrition as a result of the change, then; they may actually want to have some. If a few clients who were already on the fence about the advisor’s value decided to leave and were replaced by new clients who were fully on board, then everyone might be happier with their choices in the end.
The decision to raise fees represents a significant step in a firm’s evolution. For those that charge flat fees for advisory services, there will inevitably be a point where a fee increase is necessary to deal with rising business costs, manage the advisor’s client capacity, and reflect the advisor’s growing experience, expertise, and depth of client relationships. But more importantly, it can be an opportunity for the advisor to step up the value they are providing to their clients by enhancing their services.
Confidently articulating what the client will be getting for their higher fee can lead to a smoother fee increase conversation. But it isn’t just a sales pitch, and shouldn’t feel like it either – because the fee increase is really just one component of a bigger strategy to provide more valuable advice, meaning that the higher fees are backed by a commitment by the advisor to have a bigger impact on the client’s financial life.
In other words, if the value comes first, the higher fee will follow… which benefits both the client and the advisor in the end.