There comes a time in many firm owners’ business planning when they want to change their fee structure. Different strategical and operational factors may prompt this decision. Today we’ll dive into a few of the most common reasons RIAs will implement changes to their fee structure and what it means from a compliance perspective.

Undercharging

New firm owners face a variety of compliance challenges. One of the more difficult decisions revolves around establishing their fee structure. Among the top considerations are issues such as profitability, maintaining a competitive fee structure compared to other advisers, and demonstrating the value of services provided. Many RIAs are concerned that regulators will consider their fees excessive when registering a new firm. As a result, they will lean towards establishing a lower fee to prevent raising red flags during the registration process. Over time, the firm may need to consider a fee increase after understanding the actual time and materials it costs to provide services. 

Offering Additional Services

Established firms often find opportunities to expand their service model. A few commonly leveraged include tax planning and filing services, accounting and/or estate planning services, business consulting services, and advice on held-away assets. Each model leads to additional costs that will likely necessitate fee changes. 

Cost of Living and Inflation Adjustments

The money needed to cover basic expenses such as housing, food, taxes, and healthcare tends to increase over time. Inflation commonly describes the rate at which prices for goods and services rise, creating a corresponding decrease in household purchasing power. These economic concepts translate into factors surrounding the extent to which advisers can maintain profitability and a desirable standard of living over time. In some instances, financial planners will pre-determine annual fee increases to be administered based on these broader variable economic conditions. 

Changing Fee Structures

There are multiple methods by which an RIA can charge clients. Deciding whether to leverage fixed fee project-based planning, hourly financial planning fees, ongoing monthly or quarterly fees, annual retainer fees, or Assets Under Management often leads to a “guess and check” environment where the adviser doesn’t know which fee schedule will work until they test multiple options. As a result, many advisers find that they want to make the change from charging their clients based on AUM to a flat fee or monthly retainer model, or vice versa. At times, the administrative burden of calculating hours outweighs the benefit of offering an hourly financial planning fee. Occasionally firms find it challenging to track down unresponsive clients to gather the data necessary to finalize project-based financial planning engagements, leaving an awkward decision regarding whether or not the firm should administer the final invoice. What's more, some regulatory jurisdictions do not allow ongoing monthly financial planning fees, creating an additional hurdle for firms that maintain their principal place of business outside those jurisdictions. 

What a Change in Fee Structure Means for Compliance

Before any changes occur, there are several business decisions to consider. What does this look like from an operations standpoint? How will this impact client relationships? And, perhaps most importantly, what does this mean for your compliance program? Even if you’re unsure how to answer that last question, don’t let it stop you from making changes that would benefit your clients and your firm. Instead, take the time to educate yourself so you can take action. To help you, we’ve compiled a list of common mistakes when considering changing your fee structure. 

Not Making a Material Change on Your ADV

It is important to consider that most fee structure changes will constitute a material change from a regulatory perspective. Material changes require extra attention, as you are required to update your ADV, file an amendment, and disclose the change to your current clients. Once the ADV is filed, the Chief Compliance Officer must ensure that all advisers and supervised persons are notified to retire the previous version and begin distributing the updated Form ADV to clients. 

Forgetting to Update Your Advisory Contract

In addition to making a material change on your ADV, you’ll also need to update your Advisory Contract or Financial Planning Contract to reflect your new fee structure. This is most effectively executed by creating an effective date upon which the firm will discontinue the use of all previous contracts and ensure that only the updated contract is leveraged going forward. The Chief Compliance Officer should communicate this effective date to all advisers and supervised persons of the firm to ensure that old, outdated contracts are no longer being utilized. 

Failing to Create a Plan for Grandfathering Clients In

When completing a change in fee structure, most financial advisers will allow their existing clients to be grandfathered in. This means the clients who signed advisory contracts before the change will be allowed to maintain their original fee schedule. Note that advisory contracts remain in force until either party cancels them, and firms are not required to migrate all existing clients to new fee schedules.

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

Not Considering the Impact on Third Party Relationships

If you’ve hired an independent contractor that works with your clients, you should have an agreement with them that stipulates the terms and conditions of that relationship. Will your new fee structure impact the agreement with your independent contractor?

Some custodians or broker-dealers have separate contracts on file with your clients. Will your fee structure changes impact the client’s understanding of the difference between your advisory contract and their contract with the custodian?  It’s essential 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 advisory firm is necessary from time to time. Don’t let fears around compliance and other issues get in the way of making important decisions that will impact the longevity of your firm.

These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.