One Fee, Two Services: Combining Investment Management and Financial Planning Fees

A growing number of financial advisors understand and embrace the importance of including comprehensive financial planning in their suite of services. With this recognition comes the need to simplify fee payments and invoicing for clients.

At a glance, it would seem that the most effective way to accomplish this is to combine both services into one fee. There are apparent advantages to having the client pay only one fee for both the advisor and the client.

For the advisor, it simplifies the billing and invoicing process and streamlines payment processing. For the client, this method may appear more transparent and may be easier for the client to plan for and track their household expenses.

Unfortunately there are some regulatory hurdles that require the attention of financial planners planning to implement this payment structure.

Failure of Regulators to View Financial Planning as a Separate and Distinct Service

One of the biggest challenges that compliance officers of financial planning focused firms face is trying to get regulators to adopt a proper view of financial planning services. Many regulators are so stuck in the AUM mind frame that they refuse to see the value in financial planning outside of investment management services.

Some regulators have gone so far as to declare that “A good investment manager will automatically include financial planning services for their clients, and therefore shouldn’t charge separately for it.”

This type of commentary minimizes the practice of financial planning at best, and at worst asserts that there is no value at all that should be assigned to comprehensive financial planning.

Consequently, when advisors attempt to combine AUM and financial planning services into one fee for the client, regulators struggle to determine what portion of the fee is being assessed for each service. This often leads to a regulatory preference for hourly financial planning services due to the failure of regulators to adopt a more holistic regulatory view of the service.

As a result, it is not uncommon for regulators to require advisors to charge clients separately for comprehensive financial planning services and AUM.

Inability of Regulators to Rely on Traditional Audit Procedures

When it comes to compliance, one thing rings true across most firms: the audit process is a major source of anxiety for firm owners.

Regulatory offices have documented procedures for how audits and examinations are to be conducted. In terms of fees, billing, and invoicing, these procedures rely heavily on mathematical calculations.

Traditional practices involve accessing the firm’s ADV and advisory contracts and invoices and calculating the fee that the client should be charged. This calculation involves assessing the amount of assets in a client’s account “as of” a particular date and applying the fee in basis points to the AUM, and then dividing the result by the total number of payments occurring throughout the year.

For regulators, either this number is correct, or it’s not. No shades of gray here.

But what happens when the financial planning fee is included in the calculation? What was a simple mathematical equation becomes a seemingly ambiguous set of numbers for which there is no apparent rationale.

Therein lies the issue.

From this point, the regulator has to determine what portion of the fee is assigned to financial planning services and what portion of the fee is assigned to AUM. When the examiner is unable to do so, the burden of proof shifts to the firm, and it becomes the responsibility of the firm to effectively articulate the proper calculation so that the invoice and firm deposits can be properly evaluated.

Moreover, the firm will also have to establish some level of consistency in billing practices, which becomes complicated by the process of adjusting financial planning fees based on complexity and needs of the client. From the regulator’s perspective, it becomes nearly impossible to establish a determination on fair and equitable billing practices.

This problem can be avoided by charging separately for the services and receiving separately executed client contracts. The downside, of course, is that the client will see two separate fees.

Unwillingness of Regulators to Learn More About the Financial Planning Process

Realistically, it’s not hard to understand why regulators appear unwilling to learn more about the financial planning process. Regulators are employees of an institution and they receive a certain compensation to do their job. Taking the initiative to learn more about the financial planning process requires additional work—work for which they are unlikely to receive additional compensation.

Drafting regulations and creating audit procedures specifically for financial planning services is a laborious task. And again, I doubt there will be corresponding pay increases or resources devoted from regulatory offices to fulfill this purpose.

Understanding this may help firms exercise the patience needed to facilitate these conversations and the flexibility needed to achieve the goal of providing financial planning services. Fortunately, as financial planning services continue to expand, regulators will be forced to deal with the growing number of advisors looking for client-friendly, efficient, and effective methods to provide real financial planning to their clients.

About the Author

Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.

Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.

Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.

You can connect with him on LinkedIn.