It is a well-established tenet of business that while price is defined as the financial reward to your business for providing services to your clients, value is defined as what your clients perceive as the worth of your services to them.

Traditionally in the advice business there has been a mismatch between those two concepts. Because advisers have struggled to pin down their value proposition, their pricing models – from the old commission era to the asset-based fees model – have reflected the confusion.

But now, as advice transforms into a profession, we see greater clarity about the price of advice, reflecting a better understanding of the value of what is being sold. As a result, compensation structures are evolving from the old AUM model to more direct fee models.

Australia is moving much faster along this path than other countries, but this is a global phenomenon. Advisers are changing from being price-takers to price-makers as their focus shifts from commoditised asset management to holistic, personalised and accessible advice.

The AUM Debate

The arguments for and against the AUM model are well-trodden. In their favour is the notion that charging a percentage of assets signifies that advisers have got some skin in the game because their own fortunes are tied to the ups and downs of the markets.

On the other side is the view that an asset-based fee introduces at least a perceived conflict of interest. What if the client’s best interests are to sell assets and pay down debt? What about potential clients with low balances who need advice as much as anyone?

There’s also the problem that under the assets model, advisers take a cut in compensation precisely when they are working hardest for clients – in down markets as we have seen in 2020.

Ultimately, though, the biggest issue with the AUM  model is that it ties the adviser’s compensation, not to the true value of their advice but to the size of the client’s pie. And that leads us back to the question we started with – what is your advice really worth?

Evidence from the US

The evolution to new models is evident in the world’s biggest advisory market, the US. In his 2020 ‘Inside Information Fee Report’, financial services journalist Bob Veres found that while AUM fees remain the dominant revenue model there, a change is starting to emerge.

In a survey of a thousand advisers in May and June 2020, Veres found that just under 73 per cent relied primarily on the AUM model, down from the mid-80s five years ago, while about 14 per cent of firms did not charge AUM fees at all. “This appears to reflect a trend away from AUM, albeit in the very early stages,” Veres said.

For now, the Veres survey finds that many advisers still have no clear idea about the value of advice, with almost half of his sample reporting that they charge nothing at all for the initial financial plan, seeing this service as a loss-leader whose costs will be made up later.

But while the AUM model remains dominant in the US, the survey also found that just 37 per cent of firms are charging only asset-based fees for their clients. Indeed, the most popular arrangement is a combination of AUM plus quarterly or monthly flat retainers.