Simplifying Investment Advisory Fee Schedules With Flexible Payment Models

Traditionally, when creating a fee schedule, all payment levels would make up a single fee structure. This meant that if an investment advisor wanted to change a specific fee within the structure, the entire fee schedule would need to be recreated.

July 16, 2021 | Financial Industry

When investment advisors invoice their clients, the fees are calculated based on a fee schedule. There are several different types of fee schedules that advisors can utilize to determine a client’s fees, including flat, tiered (blended or linear), and conditional just to name a few.

For example, under a flat investment management fee schedule, all of the assets in the fund are invoiced at a single rate, a single fee, or a combination of both.

These fees are typically defined in basis points (BPS) and not percentages. One “BP” is equal to 1/100th of 1 percent, for example, .75% = 75 bps. A typical flat investment management fee schedule might look like one of the following:

• $1200 Annually
• 12 BPS Annually
• $600 + 6 BPS Annually

As you can see, the calculation is pretty straightforward. As an alternative, some advisors offer either a blended or linear tier management fee schedule. Under this model, different asset levels are assessed with different fees. A blended tier management structure may look something like this:

• First $250,000 = 40 BPS
• Next $750,000 = 38 BPS
• Next $4 million = 35 BPS
• Next $5 million = 30 BPS
• Next $15 million = 20 BPS
• Amounts above $25 million = 12 BPS

So let’s say a client is investing $50 million into a fund. Under the blended tiered model, the annual payment would be $92,850 broken down as such:

• $250,000 x .4% = $1,000
• $750,000 x .38% = $2,850
• $4 million x .35% = $14,000
• $5 million x .3% = $15,000
• $15 million x .2% = $30,000
• $25 million x 0.12% = $30,000

Linear tier management is more straightforward than blended tiers as all of the fees are calculated using a single tier. So using the same example, $50 million at a rate of 12 BPS would equal $60,000 in annual fees.

The Problem With Traditional Advisory Fee Schedule Management

Traditionally, when creating a fee schedule, all payment levels would make up a single fee structure. This meant that if an investment advisor wanted to change a specific fee within the structure, the entire fee schedule would need to be recreated.

Having to recreate the entire fee structure to make a single change creates a significant efficiency bottleneck for advisors. It also introduces a substantial amount of additional complexity and risk to fee billing. For example, if an advisor were to change its manager fees, the entire fee structure would need to be recreated and reassigned to each account.

From a risk and compliance standpoint, this increases the chances of a small error in fee calculations slipping through the cracks that could reverberate through your entire client portfolio. What’s worse, if the traditional system being used does not have an audit trail, these errors could go uncorrected for long periods exposing the firm to under or overbilling.

However, with Wealth Manager by Redi2 Technologies, inefficient, overcomplicated advisory fee schedule management is a thing of the past. Wealth Manager is a scalable and high-performance solution for managed accounts platforms. Wealth Manager comes with a wide range of features, including client billing, fee disclosure, complex payouts, and high-volume Architecture.

How Flexible Payment Models Simplify Advisory Fee Schedules

One of the features that TAMPs, broker-dealers, custodians, and anyone else in the UMA/SMA advisory landscape love most about Wealth Manager are its flexible payment models.  Here are some of the ways that flexible payment models can simplify advisory fee schedules.

Quickly Define Who Pays Who

Wealth Manager allows advisors to easily define every relationship individually, making it easy to configure who pays who. For example, advisors can offer either wrapped or unwrapped billing at the account or aggregate group level. This allows advisors to assign either of the different fee scenarios on a client by client basis:

• The client pays the advisor all fees directly. The advisor then pays the manager’s fees and platform fees.
• The client pays the advisor’s fees, manager’s fees, and platform fees individually.

It’s also easy for your operations team to add custom fees to a fee schedule without rebuilding the entire schedule. These can then be added to a payment model that is used at an account or group level.

Faster & Easier To Modify Relationships

It is also faster and easier to modify relationships using Wealth Manager. For example, advisors in a UMA relationship can easily add or remove advisors from a payment model at will. There is no need to recreate payment models, payment rules, or fee schedules – just assign new investment managers to the payment model, and then they’re available to be added to a client account.

Using Wealth Manager To Create Flexible Payment Models

With Wealth Manager, you can quickly eliminate significant operations bottlenecks and easily customize fee schedules at any level, no matter how complex the fee structure. Since each relationship within the fee has its own fee schedule, you can easily do things like changing the fee structure for one relationship while keeping the pre-existing structure in place for all other relationships.

Wealth Manager also makes it fast and easy to make changes to existing relationships or create new rules for new relationships while keeping the old rules in place for your pre-existing relationships. You can even clone rules and make minor modifications to them, allowing advisors to be more competitive in negotiations when onboarding new clients.

Schedule A Demo Of Redi2 Wealth Manager Today

Wealth Manager by Redi2 Technologies was designed to solve the billing and payout challenges of the modern wealth management firm. Understanding the need for flexibility, customization, and efficiency and developing efficient solutions for these needs makes Wealth Manager the leading wealth management billing and revenue management platform.

Wealth Manager is a cloud-based solution designed for managed accounts. It offers client billing features, fee disclosures, complex payouts, flexible billing templates, and so much more. If you’d like to take a tour of the Wealth Manager platform, click the button below to schedule a demo.