Why I Use the Retainer Model for Compensation
By Bert Whitehead
Foreword: Retainer White Paper
The use of retainers to keep an advisor on call is the most effective and ethical way to meet the fiduciary standard of our profession and provide continuing comprehensive financial advice to clients. I cannot claim to be a fiduciary if my compensation is contingent on the outcome of any transaction for which a client is paying me for unbiased advice.
The use of referral fees, commissions, and assets under management (AUM) arrangements indelibly taints the advisor as a salesperson with the final sale as the hidden agenda. As the general public is increasingly becoming aware of this conflict of interest, professional financial advisors are being gradually forced by their clients and the government to adopt arrangements which compensate the advisor for advice without regard to the results of the final transaction.
My firm, Cambridge Connection, Inc., was originally founded in 1972 and we have always used a fee-only retainer model to calculate client fees. My choice to become a financial advisor was not based on prior employment in the financial industry. After finishing law school and being admitted to the Michigan Bar Association, friends and family would often come to me for professional advice regarding taxes, mortgages, investment opportunities, etc. Even then, they instinctively realized that the advice from a broker or insurance salesperson was biased because their income is based on the sale of financial products.
Since there were no "Financial Planners" at that early date, I called myself a "Family Lawyer" providing investment, tax, estate planning, and insurance advice. I drafted a retainer agreement to provide ongoing financial advice and services to my clients, who were all family and friends at the outset. I still use this basic retainer agreement and fee calculator with clients, and it is now proprietary as part of the Alliance of Comprehensive Planners (ACP) financial planning model.
The practice grew very quickly so I increased my fees to control the growth. When I was faced with fee aversion my simple value proposition was: "If I can save you more than my fee, you should hire me!" I provided a free appointment focusing on how smarter tax and financial strategies would cut their tax bills, and sensible investment and insurance approaches would reduce the commissions they were paying. I made it a practice to never solicit new clients; all my clients are referred by other clients. Eventually the practice grew so large that I had to leave my job as a college professor to focus on my practice and train new advisors for my firm, Cambridge Connection, Inc.
Using a retainer provides our practice a built-in growth regulator. In times when we grew our practice too fast or did not bring in new advisors, current clients would refer fewer clients. I faced another retainer issue – whether clients would "overuse" their retainer so that it would not be profitable for my practice. The clients were also concerned that I would become so busy I wouldn't be able to deliver the services they expected.
Our actual experience showed that in some years some clients did need significantly more services than normal, for example if the IRS audited them or if they received a large inheritance. Each year however, a number of clients did not require more than the normal amount of work, e.g. if their daughter was getting married or they had a new baby. So the amount of work evened out both for clients and me over the course of a couple of years.
If I found that a client consistently required more services, then I would simply raise their fee. If a client perceived they were not getting adequate services, they would stop referring new clients, and eventually elect not to renew the retainer. To provide a fiduciary level of assurance that we would not grow our client base beyond our capacity, from the outset we have never solicited a client. We don't “dial for dollars” or sponsor chicken lunches for the elderly for free so we can give them a sales pitch. Nor do we make initial contact with a prospect if a client calls us and asks us to call his friend. To be a professional, the prospective client must call us first.
Through the years I have asked clients their opinion of having an advisor on retainer rather than the usual commission or AUM-based advisors. Their responses reflect their satisfaction with having someone they can trust sitting on their side of the table. They understand that the retainer fee assures them that my compensation is never dependent on whether they take my advice, so it is indeed totally unbiased.
Bert Whitehead, JD, MBA
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Want to learn more about the retainer model of compensation? Go here to get your copy of The Financial Planners’ Retainer: A Reflection of Real Value white paper written by ACP members Ken Robinson and Jacob Kuebler. This is not being released to the public until September 12, 2016.