The basis of compensation—flat fee or using a percentage of plan assets—is one of the biggest dividing lines in determining fees. More advisers seem to be using a flat fee to charge institutional retirement plans for their services, but they might wind up with comparable fees in the end.
Masood Vojdani, president and CEO of MV Financial in Bethesda, Maryland, works on an asset-based compensation model until a plan hits $100 million. “If plan assets become too large, a flat fee is the only way to remain competitive in pricing,” he tells PLANADVISER.
Up to that size, Vojdani turns to quantifiable factors such as the size of the assets, number of participants, level of service and hours of service dedicated to the plan to calculate a fee. Investment strategy and active management of the plan’s portfolios are also considered, since they require the firm’s time and staff service.
Josh Itzoe, partner and managing director of Greenspring Wealth Management in Towson, Maryland, works on a flat-fee arrangement. Although his firm does have the option of working on basis points if that’s what a client prefers, Itzoe cannot recall the last time one preferred this. “We made the move a couple of years ago based on advice from our ERISA (Employee Retirement Income Security Act) attorney,” he explains, adding that Greenspring charges separately for plan-level services versus participant-level services.
Most of the firm’s plans are fixed fee and start at a minimum of $20,000 a year, driven in part from the number of committee meetings the plan sponsor wants, with a 4% annual increase. “Ninety-five percent of our engagements are flat fee,” he says. Most clients prefer this setup.
Time is the determining criterion for Mumy Financial Advisors in Hickory, North Carolina. “When we go into a plan, we base it on the time we’re going to spend on that plan,” Ryan Mumy, the firm’s president and founder, tells PLANADVISER.
“We use a flat-dollar figure, not a percentage of assets,” Mumy explains. “When you do asset-based compensation, you can do four education meetings a year. If the markets do well, then you’re going to get a raise for doing the same amount of work.”
Mumy feels asset-based compensation is not in line with ERISA; further, he contends that using a percentage of assets can unfairly penalize plans with larger balances. “With flat per-head fees, everyone pays the same amount per month.”
Some firms use both forms of compensation. James F. Sampson, managing principal of Cornerstone Retirement Advisors, says some of his plans are flat-fee and some work on basis points, depending on the size of the plan. All are under $20 million in assets, however.
Across the board, flat fee or asset-based, all advisers agree on one quantifiable factor: the level of fiduciary responsibility the adviser takes on. As the level rises, so does the fee. “We charge more for 3(38) than 3(21) than for nothing at all,” Sampson tells PLANADVISER, a statement echoed by other advisers.
Some have travel as a specific, billable line-item expense; others do not. “Travel can absolutely be a pitfall,” Vojdani says, and one he will outline as a plan cost. “Time is a big constraint. If all the employees of the plan are spread out among different cities and in different time zones, servicing the plan can prove very taxing,” he says.
“I generally don’t specifically bill the client for travel expenses,” Sampson says. His firm bills a flat fee with most items included. However, he says, clients who want to break down the fee into “a la carte” pricing for a complete breakdown of everything can be shown how travel expenses are calculated into the price.
Itzoe’s fee includes their pricing for fiduciary advice and participant education, and the scope of the plan’s requirements drives the fee. “We have a baseline start, and if we need to scale it up, we scale it up,” he explains. The minimum charge fee for participant services includes two days of onsite, one-to-one participant meetings. Then, anything beyond that is $1,500 a day.
Art and Science
“If they want four days, they pay an additional $3,000,” Itzoe says. “It’s part art, part science. We are not trying to overcharge and hope they use us as little as possible.” The client can also scale parts of the service up or down, and make clear that they don’t want the firm to go to every satellite location every year, for example.
Meetings that involve giving all participants plan details or retirement planning education can be easier to scale since they can be done via conference call or Web demonstration, Vojdani points out. “Face-to-face meetings and one-on-ones are hard to scale with any firm that has a large number of employees,” he says, “especially if the plan you are servicing has employees in different locations.”
Another possibility, according to Itzoe, is dropping the number of quarterly meetings, and reducing the fee accordingly. “Two meetings can provide as much comprehensive oversight and due diligence as four meetings,” he feels. “We’ve told every plan they need to meet quarterly, but it may not always be necessary.” Greenspring has had success with meeting four times for the first year they work with a plan, and dropping to two plans a year afterwards. “We’ll price it as if we are meeting less frequently the first year, but meet four times, and invest in the relationship.”
“In the old days, it was how much money they had in the plan,” Sampson says. “Now, it’s segmenting plans based on revenue and even more important, based on profitability to the advisory.” The adviser must determine the hourly cost of liability, staffing and overhead.
“How many hours do you spend working on that client’s plan in a single year?” Sampson asks. “If you need to recover $250 per hour, and you’ll need to put 20 hours’ worth of work in, you need to charge at least $5,000. If you can get $10,000, great. But know that they might come back and say, ‘We don’t think you’re worth that,’ or ‘You owe us another 20 hours of work.’”
How to set reasonable fees can be something of a gray area, Sampson feels. “We all have an idea of what we should be charging,” he says. “Part of what is what we need to charge to be profitable, and part is what we think we can get.”
Itzoe is committed to offering a lot of value for the fees they charge. For smaller plans and startups, he says, they even bring down fees, in some cases.
“Fees are a part of the game,” Vojdani says. “They should be reasonable and transparent, and every adviser should be able to justify why they charge what they do.”