Why flexibility is key to one firm's fee model

The conversation around fees, compensation, and value is a hard one for advisors to escape. Whether within the industry, between firms, or introduced to clients via DIY platform advertising, there is an ever-present need to talk about fee models, products (and their related fees), and their service offerings. Add to that the growing demands on advisors to offer additional services within the scope of ‘holistic wealth management’ and questions arise of how advisors should be compensated for their growing breadth of work.

Designed Securities’ answer lies in flexibility. The independent advisory firm does not operate a grid model aimed at increasing firm profitability. Because of that approach they can allow their advisors greater flexibility in compensation models. Gillian Kunza and Michael Konopaski, Co-Founders of Designed Securities, explained how they approach these challenges, where they see fee pressure in the industry, and how other firms might be able to tackle the ongoing questions of fees, value, and compensation.

“What we try to do, more than anything, is allow the advisor options in determining their value and service and how they charge fees,” Konopaski says. “So if an advisor wants to charge a certain fee between zero and $500,000 and another fee between $500,000 and one million, they can have all the flexibility to put it into the system that way. What an advisor is looking for as sort of the ‘holy grail’ of fee charging is to let them charge what they think is suitable in the context of a particular client relationship, and I think that is extremely rare.”

Konopaski claims that his platform offers more flexibility than the majority of dealers. He notes, for example, that some dealers can’t allow advisors to charge less than 80 basis points, leaving advisors at a potential competitive disadvantage, especially with larger accounts. Konopaski attributes that limit to the need for dealer profit margins to grow with the advisor.

“There’s a narrative out there that unless you’re doing it yourself fees are materially eating into your lifetime returns, which is completely false and under values the holistic offering of what an advisor can do for a client. This messaging starts off conversations of fees with advisors with a skewed focus,” adds Kunza. “But because of the innovation in the product world, we see that some of the fee compression is happening, its just not happening at the advisory level.”

Konopaski and Kunza explain that from their experience, fee compression is happening more on the product side. Because of the rise of ETFs, asset managers have been lowering costs for years, taking less of a slice from advisors’ overall fee. One of the keys, therefore, to maximizing advisor compensation without raising fees is opening up the product shelf to advisors. Flexibility, once again, becomes a source of advantage.

That flexibility from the dealer, Kunza says, can make a huge difference in winning over large clients or the potential heirs to generational wealth. Allowing advisors to manage their fee structures more flexibly as well as choose products from an open shelf can result in stronger and longer client relationships.

Flexibility also allows for an advisor to determine the full scope of their practice and charge for it. Konopaski notes that some dealers mandate a raft of estate and tax planning services in their advisory practices. Some of those firms will make investments to provide those services, but the investments are then represented in their share of an advisor’s fees. Other firms may pay lip service to these service offerings, without making the requisite investments.

Konopaski and Kunza allow their advisors total freedom in scope. Some Designed advisors manage only investments, others will add some ancillary services and have discretion to charge for them, others function more as sources of referral, outsourcing these questions to experts they trust. Advisors have similar flexibility between the clients within their practice. They are free to offer more generic models at a certain price to the clients who don’t need additional services, and then they can offer more ‘bells and whistles’ to clients who need them, with an appropriate price adjustment.

Flexibility, Konopaski explains, is key to the model Designed has built.

“We are a flat fee dealer, so we don't need to make maximum amount of revenue off every client. We can be more flexible. An advisor pays us a fixed fee per month, rather than a grid. Because of that model we have, we can be more flexible,” Konopaski says. “We have removed our conflict of interest in the clients account size and their fees. Advisors have the flexibility to determine how to best serve their clients, and what their fee should be, because we they all pay us the same thing.”