Mike Doll: Retainer could be best fee structure

In today’s investment world, financial advisers usually charge a commission. It is simple to understand: Each time one buys or sells, he or she gets a bill for that transaction. That is called a commission.

An investment adviser usually charges one of three types of fees. It is important to know about these different types of fees because the Department of Labor’s “best interest” rule for retirement advice is moving financial advisers toward charging a fee as opposed to a commission.

The most common fee structure is the one based on assets under management (AUM). About 80 percent of fees charged by an investment adviser are charged this way. The fee is between 1 and 2 percent annually and typically declines as assets increase. If you are paying near 2 percent for your fee, find out why. I would consider anything over 1 percent to be high. This fee is typically referred to as the “management” fee.

As the assets value increases, the adviser’s income likely increases as well. It is often positioned as putting the adviser on the same side as the investor. I agree with this to a point. Where I don’t agree is when there is no cap on the amount of the fee.

Here is an example that will make this point easier to explain. An account valued at $500,000 that is being charged a 1 percent fee is equal to $5,000 annually to the firm. An account valued at $3,000,000 that is being charged 75 basis points, three-quarters of one percent, equals $22,500 paid to the firm each year. That seems like a large amount to pay for an account that does not take much more energy to manage than the smaller account. That is why I, like other advisers, put a cap on the amount charged.

The second type of fee is hourly and is used by about 10 percent of advisers. As it sounds, the adviser charges an hourly fee, and he or she may or may not maintain the account.

The third fee is a retainer and is used by about 10 percent of advisers. The retainer is a flat fee charged once or twice per year, and is set for several years at the same fee. It is often based on the net worth and income of the client. In my opinion, this type of fee will be used more often going forward for several reasons.

The intention of the Department of Labor’s “best interest” rule for retirement accounts is for the adviser to be a fiduciary and to act in the client’s best interest. There may be a conflict of interest with the AUM model. One of those conflicts is not capping fees. The other reason is that it is in the interest of the adviser to keep the assets under management. For example, an adviser may advise against paying down a mortgage or making a charitable donation because it benefits the adviser to keep the assets in the account.

I believe we will see more retainers being charged in the future. While retainers are often discussed with large accounts, I am excited about them because I believe a retainer can be used with smaller accounts.

I have been seeing more people with “orphan” accounts, which are typically smaller retirement accounts that an investor either drew down or ignored during the Great Recession. These investors are now focusing more on retirement and want help with these accounts. Small accounts for various reasons tend to get overlooked by a lot of advisers. But, with the use of an annual or semi-annual retainer, these accounts might get more attention than before. In this case, it might be a more viable option for both the investor and the adviser.

If you have an account and want professional advice, contact an adviser. He or she might be someone you want to put on a retainer to help meet your retirement goals.

This story was originally published October 3, 2016 at 12:21 PM with the headline "Mike Doll: Retainer could be best fee structure."