5 Compliance Issues to Consider When Changing Your Fee Structure

Changing your fee structure to better serve Gen X and Gen Y clients might be a smart business move if you’re a financial planner with an established firm.

Why?

In the past, providing advice on an AUM model made good sense for traditional clients. The financial planning industry was built to serve the needs of the Baby Boomer generation, and the business models created along with the industry made good sense for these clients.

The main reason it worked so well: these clients had assets to manage.

The Solution for Financial Planning Firms Serving Young Clients

Gen X and Gen Y clients, however, may not be there (yet!). Younger clients may first need financial planning advice, rather than investment advice. And these next generation clients should matter to your firm, so finding a way to make your service accessible to them while still having them as profitable clients for your financial planning firm is important.

It’s just a matter of time before Gen X and Gen Y inherit assets and work long enough to build their own wealth. But an AUM model doesn’t work for someone without assets today.

Enter a new solution, one that XY Planning Network and the financial advisors who make up membership, have spearheaded in the industry: the monthly retainer model. This is a new way of charging your clients, and can be added into your firm’s current model as a way to make doing away with asset minimums and charging AUM a realistic way to grow you business.

What a Change in Fee Structure Means for Compliance

If you’re considering a change in your fee structure to better serve next generation clients, there are likely a number of issues surrounding compliance that you’ll want to address. Compliance is a tough topic to tackle for most independent RIAs, since most financial advisors must act as their own Chief Compliance Officer.

But that shouldn’t stop you from making a change to your business that would benefit both your clients and the firm itself. Instead of not taking any action at all, get proactive and educate yourself.

To help you, we’ve put together the 5 things you need to consider from a compliance perspective if you want to change your business’s fee structure.

1. Make a Material Change on Your ADV

From a regulatory perspective, the most important thing to consider when changing your fee structure is that most states consider the update a Material Change. Material changes require an extra level of attention, as you’re required to update your ADV, file an amendment, and disclose the change to your current clients.

2. Update Your Advisory Contract

In addition to updating your ADV, you’ll also need to update your Advisory Contract (also known as your Financial Planning Contract) to reflect your new fee structure.

While it may not be mandatory in all states, it’s a good idea to notify your regulator that you are making this change. Allow them the opportunity to review your new advisory contract for any misleading or confusing items.

3. Evaluate Relationship Risk (Or, Ask “Will They Stay or Go?”)

It’s inevitable that some of your clients will question your fee change -- and they may even be critical of the new way of doing things. From a client services perspective, prepare to discuss the rationale for the fee change with your current clients.

When you notify your current client base of this change, you should be able to discuss the value your service is currently providing for them. You can also consider expanding your services for existing clients prior to changing your fees, and present that anticipated expansion in the conversation with the client.

An example would be utilizing new financial planning software to provide a more holistic view of the client’s financial picture.

4. Have a Plan for Grandfathering Clients In

Most financial advisors, when completing a change in fee structure, will allow their older clients to be “grandfathered in.” This means the clients who signed advisory contracts prior to the change will be allowed to maintain their original fee schedule.

This is best practice, because you risk losing the client if you go to them and ask them to “sign up” for higher fees. As your business grows and changes -- be it through a fee structure change or simply a rise in rates for newer clients coming on board -- be prepared to answer questions that may arise if common clients of yours speak to each other, and find that they are not paying the same fees.

This can lead to resentment, the questioning of your business practices, and eventually losing clients.

5. Consider the Impact on Third Party Relationships

Perhaps you hired an independent contractor to work with your clients, and you have an agreement with them that stipulates the terms and conditions of that relationship. Will your new fee structure impact the agreement that you have with the independent contractor?

Or maybe you have a primary custodian or broker dealer, and they have a separate contract on file with your clients. Will your fee structure changes impact the client’s ability to understand the difference between your advisory contract, and the contract they have with the custodian?

Be sure to consider these kinds of relationships, along with your client relationships, when making changes to your fee structure.

Making business changes for the future growth and health of your independent RIA is necessary from time to time. Don’t let fears around compliance and other issues get in the way of making the decisions that will ultimately better position your firm to serve the next generation of clients gearing up to find their ideal financial advisor.

About the Author: Scott Gill is the Director of Keeping Us Compliant here at XY Planning Network. Outside of the office, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.