Monday, April 18. 2011
The inspiration for today's blog comes in part from the recent launch of the CFP Board's new public awareness campaign and their Let's Make A Plan site. The public awareness campaign has been mired in some controversy since it was first announced (as previously discussed on this blog), in part because it was designed to target the mass affluent, which some planners criticized as perpetuated the belief/perception that financial planning is "only" for the affluent (notwithstanding the fact that that actually is the primary segment of the market that financial planners currently serve). On the other hand, many countered by pointing out once again that planners don't have a business model to serve the masses effectively anyway, so why build awareness there? But is it really so impossible to build a business model that serves the masses? What does it take?
Let's imagine we're going to start a financial planning firm to serve the masses. We're going to charge a very "accessible" price of $100/hour (which, notably, is actually lower than what many hourly planners currently charge under the Garrett Planning Network hourly model). We'll assume the average meeting lasts for 1.5 hours; clients pay $150 for a "financial planning checkup" when they need it. We'll assume a planner can see 4 clients per day on this model (which takes 6 hours of planning time), with the remaining time in the day for office work, catch-up details, etc. This means the planning firm collects $600/day in planning fees, which is $3,000/week, and $150,000/year of gross revenue assuming a 50-week work year.
Of course, we have to pay some expenses. We'll pay the planner $50,000/year, which frankly would be a great starting salary in most areas for a newly minted CFP practitioner who has no responsibilities besides seeing a series of clients day after day to advise them on their needs. In addition, we'll need to pay the cost for some basic office space in which to meet the clients, and some software and supplies; let's generously assume that all of these other expenses, including some part-time administrative help, cost the firm another $40,000. This means at the end of the year, the firm generated $150,000 of revenue, and $60,000 of profits, for a nice and healthy 40% profit margin. And frankly, many firms could probably run a lean office on less than $40,000 of expenses, especially if they kept office rent costs reasonable.
So what's the problem? Here's a business model with a healthy 40% profit margin, a job that a new planner would love to be hired for, and financial planning services for the masses at a remarkably affordable $100/hour.
The problem - the catch - is that in order for this model to be effective, the firm needs to meet with a lot of clients. If the planner sees 4 clients per day, that's 20 per week, and 1,000 clients per year. In a world where many financial planners consider it a "great" year if they take on a dozen new clients, and reach capacity at somewhere around 100 client relationships, the idea of bringing in 1,000 clients per year is daunting, to say the least!
But what this means is that the challenge to serving the masses effectively is not a business model problem, per se. It's a marketing problem. Or more directly, it's a problem with the public's perception of the value of financial planning, such that people don't seek out and demand financial planning services; instead, financial planning must be sold. We have to convince each prospective client, one by one, that financial planning has benefits worth paying for, that it has value, and that the client should do business with the planner. In other words, the problem is not the lack of a business model to serve the masses effectively; the problem is a marketing model to convey the value of financial planning to the masses effectively.
Of course, one solution is for the firm to step up on marketing, and use some of the aforementioned 40% profit margin to implement marketing to a large number of prospective clients. In practice, though, it is difficult or nearly impossible for a single small firm to deliver on this. Thus, once again, the challenge re-emerges that the problem is not a business model to serve the masses, but that a business who serves the masses doesn't have the scale to market to the masses.
That's where larger organizations come in. Whether it's the CFP Board's public awareness campaign itself, or the work that Sheryl Garrett does in promoting the value of financial planning to the public at large, the opportunity for such organizations is to build public awareness for the masses; to convey the value of financial planning, with scale, to a broad base of Americans, so that planning firms can be implemented to serve the masses because they will have to spend less time marketing, so they can spend more time actually serving clients.
Granted, the CFP Board's current focus for the public awareness campaign is still on the "mass affluent" and not the rest of Americans who need financial help, but as the CFP Board's own statistics show, perceptions of the value of financial planning are weak in this segment as well, and we have to start somewhere. If the CFP Board's campaign brings measurable success in the coming years to this segment of the market, I expect and hope we'll see them expand the focus even further, demonstrating the value of financial planning - and therefore, bringing the value of financial planning - to a broader slice of society.
But the bottom line is that when we talk about the challenge of delivering financial planning to the general public, let's stop talking about the business model problem, and start talking about the marketing and public perception problem. Because if everyone out there really believed that getting a financial check-up to get their lives on track was worth spending $150/year, and therefore demanded the services of a financial planner, the rest would be... well, easy.
So what do you think? Is the difficulty in serving the mass of Americans a problem of business models, or a marketing and public awareness challenge? If there was wider understanding of the value of financial planning, such that more people demanded and wanted financial planning services, could smaller practices that serve the average American survive and thrive? What can we do to better convey the value of financial planning to the masses, in order to achieve this?
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Perhaps. But on the other hand, if this is done with some scale - i.e., a firm with multiple planners serving thousands of clients - pooled administrative help amortized across several revenue streams becomes very manageable.
This post is right on target. The challenge here is how to raise public awareness of the value of financial planning. I can't tell you the number of networking conversations where I'm asked, "what insurance or annuities do you sell?" before getting a look of complete incomprehension that there could even be a business centered around objective advice, not products.
I have found that unfortunately most middle class consumers have an unfavorable attitude about actually paying for planning. Many are brainwashed to believe there is a way to get financial service products for free or artificially low cost so they don't want to pay a reasonable fee to a financial planner.
The grocery store does not force consumers to buy junk food, the liquor store does not force consumers to drink. It is consumers own free will to to engage in deferred gratification, discipline, thrift etc. that makes them succeed. Unfortunately many lack the will power to complete a detailed financial plan or to pay for it.
I have to admit, I don't think the demand is there.
I know quite a few Garrett Planning Network planners who run a business model like this. They're managing, but I don't know any who would say their big problem is so much demand they can't find any planners to hire to meet with their excess clients.
The benefit that a doctor provides is tangible. It's the same with an engineer or a lawyer.
A good financial planner is more a teacher than anything else. We need good teachers and we need good financial planners. But they both have a hard time making the compelling case that people should turn over significant sums of money to gain access to the expertise they possess.
It's always a good idea to visit a financial planner. But it is rarely a compelling idea. Most middle-class people don't hire lawyers or engineers or doctors either except when they are left with no choice.
I agree with you (always a safe bet, btw). If you're going to serve the mass-affluent market profitably, I believe you have to have tremendous scale in your business. Think about the Dentist, he/she makes a good living. Granted he/she devoted more time and money and sacrifice into their formal education than most planners. But, how well do you really know your Dentist? They do most of the talking in the relationship since you have tools inserted into your mouth 95% of the time. You see them twice per year at the most. I think most financial planners want to develop deep relationships with their clients and hence the need to work with a smaller client base. If you're going to deep dive with clients, you have to limit the number of clients you work with. There is a big company in Malvern, PA that does a pretty good job serving the mass affluent market. It's also engrained into our brains early on that we have to see the dentist every six months.
Since the company retirement plan is the main vehicle for retirement savings for the mass aflluent market, perhaps we need to do a better job of offering education and advice to participants in corporate retirement plans. Just a thought.
Very interesting, and thanks for sharing. I'm just becoming more familiar with the Statement of Advice rules you have in Australia.
What if the advice pertains only to a limited area - i.e., it's not "comprehensive" planning advice, it's just regarding college planning, or tax planning, or a portfolio review. Are the SoA requirements less cumbersome? If there was a strong software package to support it, could you actually develop the SoA recommendations live with the client as you engage in the planning process?
Thanks so much for sharing the international perspective!
limited scope would certainly work better. In our firm we effectively do just as you suggest, engage the client using planning software to the point of clients taking a decision, and then tidying up when they leave. Certainly would be a much quicker post meeting if the scope is limited.
if you were focussing on this type of limited advice business, the problem is as your article suggests, lack of numbers of clients (or lack of ability to attract consistent high numbers of clients with new issues.)
In Australia the bank planner/industry super fund planner business model is based on this. For many new planners, these roles are a stepping stone before they join firms catering for less clients with more complex needs.
In my opinion many small RIA's can be sutainable off of referrals, because 10-15% growth can be achieved simply by referrals. However, the RIA owner is usually stuck in a "self-employed lifestyle business" which is great for many, but is not scalable.
I think Edelman is a great example of what's possible for broad reach marketing to make serving the mass affluent feasible.
The caveat is that when more and more firms are doing this, small RIAs will find it increasingly difficult to generate business even by referrals if they don't otherwise have a niche or means to build relationships with prospects.
When there are 10-20 advisors doing what Ric Edelman does, fewer and fewer people are going to choose to do business with a small local RIA no one has heard of before. There will always still be small local businesses, but they will find it harder than ever to grow when national firms become genuine competition at the local level.
I have been promoting this solution for years and whiile I get lots of positive feedback, few employers want to take on additional cost and potential liability. But, more financially successful workers are more productive, spend less time away from the job, have less stress and are more likely to stay with the employer.this is also something a labor union could provide for its members.
It is in the workplace that we truly demonstrate that everyone can benefit from a financial plan. Once it is a widespread benefit at large organizations a natural market will grow among those who work for smaller employers.
Indeed, Veritat - now Nestwise - is similar to the Garrett Network in this regard.
But the issue is really not the tools and model, per se. The monthly coaching model existed long before Nestwise, as have a number of efficiency tools.
The problem with Nestwise - and Garrett planners, and anyone else trying this model - is NOT how to deliver it profitably. It's how to get enough clients to fill the time and revenue in the first place.
In other words, it's not a profit problem (which is about scalability). It never has been. It's a revenue problem (which is about marketing and business development).
Whether Nestwise has a system to help its planners get many dozens or a few hundred clients in a short period of time remains to be seen.