Stress Test Your Fees While Markets Are Good

A step-by-step gut check for your P&L, with data and insights from my friends at AdvisorEconomics.

Raising fees in a down market feels impossible. Nobody wants to send that letter the same month their clients open a statement that's down 20%. So, if your fees need fixing, the window is while portfolios are up and clients are feeling good about you.

Here's the problem. Most advisors don't know if their fees need fixing until a downturn tells them. By then the conversation is ten times harder.

So, let's find out now.

Why now (and why this isn't doomsday thinking)

Bear markets aren't rare, and they aren't always quick. The dot-com bear market ran from March 2000 to October 2002, and the S&P 500 lost about half its value along the way. The 2008 financial crisis took about 17 months to bottom. Even 2022, which felt mild by comparison, took roughly nine months and a 25% drop before things turned.

Planning for a 20-month downturn is a middle-of-the-road scenario. It's the kind of thing a good advisor would plan for in a client's retirement projection without blinking.

Your own business deserves the same treatment.

And I'm not the only one hearing this concern. When I posted about it on LinkedIn, Abdennour Aissaoui, co-founder (with Michael Kitces) of AdvisorEconomics, shared that he's heard it directly from the advisors using his platform.

"When the next 2008 happens... somebody will get let go. It's not their fault, but we can't just afford them anymore" -AdvisorEconomics user as shared by Abdennour Aissaoui

Here's how to stress test your fees in five steps

You don't need fancy software for a first pass. A spreadsheet and an honest hour will do it.

1. Pull your last 12 months of revenue

Split it into two buckets: AUM fees and everything else (planning fees, flat fees, retainers, hourly work). The AUM bucket moves with the market. The other bucket doesn't.

According to Aissaoui, AUM fees made up a median of 97% of total revenue. The smallest firms lean on other fees the most: under $500K of revenue, it's closer to 80%.

2. Cut your AUM revenue by 25 to 30%

Hold it there for 20 months or more. Your workload won't shrink with it, of course. Clients call more when markets drop, not less. You'll be doing more work for less money, so plan for that.

3. List your fixed expenses

Payroll, benefits, rent, tech, compliance, insurance. The stuff you pay no matter what the market does. Be honest here, and include what you pay yourself.

According to Aissaoui: "When owners include what they pay themselves, the median firm's expenses are 66% of revenue, and payroll (team plus owners) is about two thirds of that (43% of revenue). When they don't, its 46%, and hired staff are about half of that (22% of revenue). That's a significant difference many firms don't account for."

4. Run it month by month

Subtract your fixed expenses from your shrunken revenue, one month at a time. Where does the monthly shortfall land? How many months of cash do you have in reserve to cover it?

5. Ask the hard question

Can you make payroll in month 14? Month 20? That includes your team and yourself.

For a lot of firms, the honest answer is no.

Aissaoui puts the risk this way: "Counting what owners pay themselves: about 1 in 5 firms (13 of 68 from our data) can't at a 25% drop, and about 1 in 3 at 30%."

Two firms, one downturn

Firm A:

One owner, about $2.5M revenue, about 360 households, about two full-time support staff.

99% AUM fees.

Costs before owner pay: about 39% of revenue, hired staff under 15%.

At a 25% drop it still pays every staff member and every bill through month 20; what the owner takes home (salary plus profit) falls from about 61 cents of each revenue dollar to 36.

Firm B:

Also one owner, about $2.6M revenue, about 350 households, but two hired advisors and five support staff.

99% AUM fees.

Costs before owner pay: about 71% of revenue, hired staff 42%.

It still pays every staff member through month 20, but what the owner takes home falls nearly 90%, from 29 cents of each revenue dollar to 4.

Here's where it stings

When I walk firms through this, the shortfall almost always traces back to payroll. And a lot of that payroll was added to solve a capacity problem. The team felt stretched thin, so you hired.

But often the real issue was an underpriced service model. Clients paying 2014 rates for 2026 service. Now that hire is one of your biggest expenses, and it's funded by the exact revenue that's about to shrink.

Fix the pricing now and that salary is covered by fees that match the work. Wait for the downturn and you're choosing between a fee letter nobody wants to read and a layoff nobody wants to make.

What to do with your results

If you passed, congratulations. Run it again once a year, and anytime you add a hire or a big expense.

If you didn't, you've got options, and you've got time. Use it.

• Revisit your pricing. Are your fees aligned with the work each client needs today?

• Consider growing your non-AUM revenue. Planning fees, flat fees, and retainers don't drop when the market does.

• Look at your minimums. Small accounts that take the same work as big ones get even more expensive in a downturn.

• Clean up your service model. Make sure what you deliver matches what each client pays for.

• Have the fee conversations now. While statements look good and clients are happy.

Want a second set of eyes on your numbers? I help firms optimize their profitability by looking at their fees, client base, service model, and provide an objective framework on their true value and cost-to-serve.

Book a complimentary consulting call and we'll walk through your stress test together.

Abdennour Aissaoui is the co-founder & CEO of AdvisorEconomics, which he started with Michael Kitces. AdvisorEconomics is an automated KPI & benchmarking platform for advisory firms. It plugs directly into the accounting system and shows owners how their firm compares with peer firms.

With their Goal Seek tool, you can set how far you can let your take-home income fall, drop revenue, and see which costs you'd have to cut to stay there.

Data and case studies courtesy of AdvisorEconomics.