The AUM model for financial advisors has experienced tremendous growth over the past 20 years, from the rise of the independent RIA to the broker-dealer shift to fee-based accounts. And despite the rise of critics questioning whether the AUM model is the most effective way to align what the client pays with the value being provided, the accelerating momentum of major firms transitioning to the model suggests that not only is the AUM model here to stay… but there may soon be too many financial advisors using the same AUM model to pursue the same relatively-few households who have sufficient liquid assets available to invest and who are actually willing to delegate them to an advisor in the first place. In fact, if the entire advisory community makes the AUM shift all at once, there may be no more than about 23 clients per advisor available!
Yet the reality is that the opportunity in the marketplace for financial advice goes far beyond just those who have at least $100,000 of investable assets available to roll over to an advisor to manage. In part, this is because some advisors are now shifting to an “Assets Under Advisement” (AUA) model that aims to charge clients not just a percentage of their managed portfolio, but a percentage of their entire net worth (on which the financial advisor is providing holistic financial advice), opening up a larger segment of Mass Affluent (and Millionaire) households who have the financial ability to pay for advice, but not the liquidity to access it by rolling over an investment account (e.g., because their assets are tied up in a 401(k) plan where they’re still working!).
However, the even-bigger opportunity to expand financial advice is not just to shift from charging a percentage of assets to a percentage of net worth, but instead to charge a percentage of income instead. Which opens up yet another swath of consumers – commonly known as the “HENRYs” (short for High Earner, Not Rich Yet) – who may not have substantial assets or net worth, but have more than enough income to pay for advice directly out of their income, whether on an hourly, monthly subscription, or annual retainer basis.
And while for high earners, the most straightforward approach may be to simply shift from charging 1% of assets to 1% of income, the reality is that just as AUM fees are typically tiered on a graduated fee schedule – with higher-percentage fees for smaller portfolios and lower fees for sizable accounts – a percentage-of-income fee could be tiered as well. In fact, at a 2%-of-income fee, even median-income households (earning approximately $60,000/year) become economically feasible to service with advice… for which even a 2%-of-income fee can often be recovered by providing good advice on the other 98%, at a cost that is little more than what such individuals would pay in commissions on even a modest IRA rollover into A-share mutual funds or via an insurance purchase.
The key point, though, is simply to understand that, while the AUM model continues to be popular, and has a lot of benefits that make it easy for consumers to pay and highly scalable, it is naturally limited in market size to those who have liquid portfolios available to manage. While the rising shift to alternative models, particularly a percentage-of-income fee, opens up entirely new “blue oceans” of consumers who are not served today by holistic financial advisors!
source https://www.kitces.com/blog/the-new-1-advisory-fee-1-of-income-instead-of-1-of-assets/
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