The Real Hidden Cost That Has Been Inhibiting Financial Planning For The Masses

Posted by Michael Kitces on Monday, December 16th, 7:01 am, 2013 in Planning Profession

As financial planning slowly and steadily builds itself towards being an established profession, there has been an increasing focus on the importance of figuring out how to widen the scope of financial planning to reach more of the masses. Although notably, it seems that recent efforts to expand the reach of financial planning services is not purely altruistic; the reality is also that there are simply a lot more CFP certificants around than there used to be, making it increasingly appealing for advisors to seek out new audiences to grow their businesses, rather than compete in the same bloody red ocean of their competition.

Yet notwithstanding the growing desire to reach the masses, financial planners have struggled to extend their services. The promise of the web and the potential efficiencies of technology create the potential to bring down the cost of financial planning and make it more accessible to the masses, even as planners now find that they may soon be in competition with the technology itself seeking to deliver parts of those services directly to the public in the form of "robo-advisors."

However, the reality is that the real inhibitor to bringing financial planning to the masses is not about the use of technology to drive down the cost of delivering financial planning. The real challenge is how difficult it remains to get new clients in the first place, especially given that so many financial planning firms have relatively little cash flow available for broad-based marketing programs. The end result - the real challenge in bringing financial planning to the masses is not about the cost to deliver it, but the incredibly high cost necessary to get those clients in the first place! When we figure out how to bring down the cost to acquire clients, we will figure out how to truly bring financial planning to the masses.


Defining CAC - Cost Of Client Acquisition

In any business, the ultimate path from gaining a new client/customer to generating a profit from the product/service sold to them involves several costs. There are basic overhead costs to operate the business, additional costs to produce the good or service itself, all of which contribute to whether the sale of the product/service is profitable in the first place.

Yet beyond the raw costs to produce and deliver a particular good or service, there are also costs to market and grow the business, or what are generally called "CAC" - Client/Customer Acquisition Costs. After all, if no one knows about the product or service, and/or they don't receive information that helps to convince them to purchase the product/service, there won't be any revenue generated. The nature of CACs vary by the line of business, but might include anything from commercials and marketing campaigns, to giveaways and free samples, to websites and marketing brochures, and more. Generally, any cost that falls into the category of finding prospects, or helping to turn prospects into customers/clients, is part of the business' CACs.

In the context of a financial planning firm in particular, CACs might include the cost of website design, brochures and other marketing collateral, prospect seminars and events, and buying "leads" or paying for various lead generation services, as well as less-commonly-used approaches like outright advertising, paying solicitation/referral fees, etc.

The Impact Of CACs In Practice

In a business like financial planning - where the service is intangible and difficult to explain, general public trust in financial services is relatively low, and the price point (cost of a financial plan) is not inexpensive - it can be very difficult to find prospects and convince them to actually become clients. In other words, financial planning is a world with relatively high client acquisition costs.

This challenge is expressed in numerous subtle ways across financial advisory firms. Many firms have resigned to the fact that since marketing is so expensive and relatively ineffective - i.e., you need to spend a lot to get any real benefits (i.e., clients) from it - they just skip it altogether and rely on referrals alone for growth. In other words, the fact that referrals are the most common approach to growing a practice may have less to do with the idea that it's a "best practice" and more to do with the fact that every other method is just so darn expensive. That's the consequence of having very high CACs.

Yet that's not to say that investing in marketing has no Return On Investment (ROI) at all. To the contrary, the fact that a small subset of mega-firms with huge budgets for marketing and branding still control a large portion of assets speaks to the fact that marketing can work; for instance, notwithstanding all their controversies of recent years, wirehouses in the aggregate have under 20% of all financial advisors but control nearly 40% of investment assets. Similarly, many larger regional RIAs are beginning to grow to a size where they can afford to invest more heavily into their marketing - reaching the high CAC threshold - leading to a growing inequality in marketing between large and small firms, signified most recently in the Schwab survey finding that the greatest competition for most advisors in the coming years is competing with the rise of larger regional RIAs.

As a consequence of these CAC challenges, most advisory firms grow relatively slowly - lacking the capital to spend on high  CAC marketing strategies - and often end out charging a higher price to make up for the fact that they have relatively few clients. In other words, if you "know" that you're only likely to get a couple of clients every year, there's little choice but to charge a relatively high fee (or otherwise ensure that you generate a material amount of revenue per client), or it simply takes too long to build an economically viable business.

Yet unfortunately, the end result of these difficulties is that financial planning firms struggle to serve the middle class and mass affluent - not because it's expensive to provide planning, per se, but because the high cost to acquire clients leaves most planning firms undercapitalized and/or "stuck" with a relatively modest growth rate that necessitates higher prices simply to be able to afford to make a living.

Financial Planning In A World Of Low CACs

To understand just how insidious the problem of high CACs really is, imagine a world for a moment where the cost for a business to acquire clients was ultra-low, near $0. Financial planning firms would basically have an "unlimited supply" of clients available to service. The question then becomes - how inexpensive could financial planning services actually be?

As a starting point, let's look at what happens if we try to charge a very "accessible" price of $100/hour (which, notably, is lower than what many/most hourly planners currently charge under the Garrett Planning Network hourly model). If each meeting lasts for 1.5 hours, clients will be paying $150 for a "financial planning checkup" as needed. Let's assume the planner can only see 4 clients per day on this model (which takes 6 hours of planning time), with the remaining time each day for other office-related work. 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 with 2 weeks of vacation.

Of course, someone has to do the planning work and be paid; we'll assume the planner makes $50,000/year, a very reasonable 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 basic financial planning 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! If the advisory firm could run the office a little leaner on cost (perhaps $20,000/year), and "only" wanted a 25% profit margin, the planning fees could be as low as ~$60/hour for $100 for a 90-minute checkup! (And bear in mind, we've seen advisors start their RIAs for less than $10,000!)

Again, though, the "catch" is that operating this model requires an extraordinary number of clients. If the planner sees 4 clients per day, that's 20 per week, and 1,000 clients per year. In our magical world of ultra-low CACs, it's easy to get 1,000 clients per year. In the real world, it would be so expensive to do the marketing necessary to generate 1,000 clients per year, the entire business model would break down; fees might have to be double, triple, or more (and would necessitate a lot of upfront capital) just to have a chance of creating the client volume necessary!

Why The Secret To Financial Planning For The Middle Class Is All About CAC

The fundamental point of this discussion is that the real secret to getting financial planning to the middle class is not about technology and efficiency and a lower cost delivery of financial planning. Sure, as the example above shows, if the planner could see a few more clients every year, or be paid a little less, or the office rent was a bit lower, or the technology was a bit better to allow more efficiency, the planning firm might be slightly more profitable. But the real problem is none of those things. The real problem is that no one knows how to generate 1,000 new clients every year without an inordinately high marketing/CAC expenditure that forces the prices to be so high that few of the 1,000 clients could afford it. In other words, the real reason financial planners fail to serve the majority of Americans is not a matter of the cost to deliver financial planning, but the cost to market it.

Notably, this is also the fundamental reason why many of today's "robo-advisors" are in serious trouble from the start. They have approached the challenge of bringing financial planning or investment advice to the masses assuming that the key was just to have "better technology" to make the cost of delivery lower, while failing to recognize the challenging reality of marketing and client acquisition costs. Accordingly, this is why we see Betterment offering $40 sign-up affiliate fees to bloggers, why Personal Capital keeps rolling out new free software and tools (to give them prospects they can call upon), and why LearnVest recently announced a partnership with American Express and some 'large employers to be named later' (seeking out channels to efficiently deliver a high volume of clients). Of course, the caveat remains that it's not clear whether any of these approaches will generate the requisite client volume, especially since most of these firms have priced their services so low they have a very limited budget to invest in broad-based marketing and branding efforts in the first place. And the reality is that financial planning is still purchased based primarily on trust, not raw cost, in the first place.

Conversely, recognizing the importance of driving down CACs with scalable marketing explains why many larger RIAs are thriving and threatening smaller RIAs, as they obtain the resources to reinvest into high CAC marketing. Similarly, it explains why a firm like Edelman Financial Services can be so successful serving middle class and mass affluent investors (with $10B of AUM and 22,000 clients last year) with physical offices and branches and in-person meetings; because their marketing is so efficient (now being leveraged with the former CMO of Comcast!), and their client acquisition costs are much lower, built on the back of Edelman's tremendously successful media presence of radio, television, books, and more (allowing the firm to add a whopping 4,000 clients in the past year!).

Financial advisors have tried to address this in a variety of ways over the years, from pay-per-lead services to generate clients (and now a series of "NextGen" lead generation tools and services like Vestorly, AdvisorDeck, and AdviceIQ), to joining organizations that provide financial planning leads (from Garrett Planning Network to NAPFA to the FPA's PlannerSearch tool and the CFP Board's "Find A CFP Professional" service). Similarly, for some advisors, this is why social media and inbound marketing approaches have become so appealing; they represent a means of creating highly scalable marketing at a fraction of the cost of traditional marketing means. Nonetheless, most planners seem to struggle, despite the various avenues available; the number of firms that actually bring on more than a few clients every year is surprisingly sparse.

On the other hand, this doesn't mean the situation is hopeless. One of the key reasons why a fiduciary standard for financial advice is so important is that it creates the potential of reducing the costs and struggles of acquiring clients, which means implementing a fiduciary standard could actually lower the cost of advice and make it easier to bring financial planning to the masses (in direct contradiction to the common criticism that fiduciary is a higher cost model). Similarly, services that bring transparency to the regulatory records of advisors, like BrightScopeand FINRA's new BrokerCheck, help as well. As more financial advisors obtain minimum designations like the CFP certification, and advanced designations from there, the competency of financial advice overall improves. And as we continue to do (competent) financial planning effectively for the public - albeit one person at a time - the understanding of the benefits of financial planning does grow, slowly and steadily, aided by efforts like the CFP Board's "Let's Make A Plan" campaign.

The bottom line, though, is simply this - as long as financial services suffers with low public trust, and sells an intangible service that is very difficult to describe, the costs of acquiring new clients may remain persistently high. And as long as the CACs remain high, just trying to build a low-cost delivery system for financial planning for the masses - without addressing the cost of client acquisition - will be a model doomed to fail. Financial planning, sadly, is not an "if you build it, they will come" kind of model... at least, not until we become much better at conveying the benefit of financial planning to the general public, improve the competency of the average advisor, and repay our collective trust deficit with the public.

Until then, though, we have to recognize that the real reason we can't seem to get financial planning the masses is not because financial planning is expensive to deliver, but because it's so difficult build trust with prospects and turn them into clients in the first place.


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