Will Monthly Retainers Be The Next Big Business Model In Financial Planning?

Posted by Michael Kitces on Monday, October 28th, 7:05 am, 2013 in Practice Management

The business of financial planning is in a state of flux, both within the US and around the world. The broad financial services industry has gone increasingly in the direction of a relationship-based assets-under-management approach, a combination of the potential to serve clients with ongoing financial planning, the allure of recurring revenues, and technology's brutal commoditization of many previously-profitable transactional business models - a potentially prescient shift, as the potential for fiduciary regulation in the US could further flatten much of the transactional commission-based model as is occurring with the regulatory reforms of other countries around the world.

Yet at the same time, financial planning faces a new challenge - the increasing focus on the AUM model has left it a profitable way to serve the asset-centric baby boomer generation, but is an ineffective model to reach the even-larger Generation Y that simply does not have the assets to support the model (along with a large segment of Gen X that, similarly, simply does not have the liquid net worth to work with advisors on an AUM basis). The end result is that as financial planning goes increasingly fee- and fiduciary-centric, it is struggling to find a way to serve "the rest" of the market beyond affluent baby boomers.

While the hourly financial planning model has shown some promise, its ability to gain traction has been limited, arguably due in part to the fact that it is a very transactional model for what is ultimately a relationship business, and because the pricing model makes the costs so salient for consumers that many balk at the immediate cost-benefit trade-off. Yet an alternative, through a combination of business refinements and the efficiencies of technology is beginning to emerge: a monthly retainer model, structured like a "financial planning subscription" that may finally open up financial planning to the middle class with a sustainable, profitable business model.


The inspiration for today's blog post was a recent article written by Ron Rhoades on RIABiz (as discussed previously in Weekend Reading), which posited that the Garrett Planning Network's hourly financial planning approach may ultimately be the professional fiduciary model of the future. After all, hourly billing has a central role in the compensation of other recognized fiduciary professionals like attorneys and accountants, and with financial advice on a fiduciary path, Rhoades suggests that it may be the final destination for financial planning as well. But will hourly really be the next big business model in financial planning, or is there a better alternative?

A Transactional Model For A Relationship Business

The fundamental problem with the hourly financial planning model is that it's a transactional model, which is difficult to apply in the context of financial planning, with its comprehensiveness, its holistic multi-step process, and its ongoing monitoring needs. Hourly works well as a mechanism to pay for tasks with a finite scope - prepare this tax return, or evaluate this business merger, or help me defend this lawsuit - but much of the essence of financial planning is the exact opposite of this. Financial planning doesn't just end once a limited amount of information has been analyzed and a recommendation has been rendered.

This is not to say that there aren't finite, transactional tasks in financial planning, as evidenced by those who have had some success under the hourly model. Some people really do just want a retirement review or help determining if they have enough to retire, someone to analyze their investment portfolio, help in strategizing how to work down a debt load, a determination of whether an insurance policy needs to be replaced, or some advice on budgeting and cash flow. These fairly limited scope, finite tasks can fit reasonably well into an hourly model.

The challenge, of course, is that it's difficult to find enough of these transactional, limited scope engagements, to add up to a healthy amount of revenue and a livable wage as a financial planner. The problem is exacerbated by the fact that, for most small hourly planning firms, the time it takes to market and find prospective clients can ultimately eat away at the time available to actually do the billable-hour work! Thus, the hourly model is left in a catch-22, where it requires a great deal of marketing to generate a sufficient volume of clients, yet spending so much time marketing would make it impossible to serve that many clients anyway. Of course, the problem could be "easily" resolved if there was a broader understanding of the value of financial planning in the first place, such that there was a greater demand for it... but as long as that's not the case, the real reason financial planning struggles to reach the middle class remains a challenge of generating sufficient client volume with limited marketing capabilities (amidst a highly distrusted industry to boot).

Fee Saliency, Fee Sensitivity, And Payment Models

These marketing challenges, and the end result of having a limited number of hours to bill on and a limited number of clients to bill, indirectly "forces" many hourly financial planners to charge $150-$200/hour or more, as it's the only way to reach the amount of revenue necessary to make the business model work. Unfortunately, this is turn creates what many consumers perceive as a relatively high cost barrier to engaging an hourly financial planner. Simply put, for what is essentially a transactional model that exchanges "a solution" for $300 (a two-hour planning engagement), not many consumers think of their problems as "$300 problems" that merit such a(n expensive) solution.

In other words, another part of the challenge of the hourly model is that it makes the fee highly salient - people have to cut a check (or in a few cases, whip out a credit or debit card) at the end of the meeting to pay, on the spot, for the solution they just received, which makes them immediately question whether the value is worth the cost. The scenario is even more problematic if the hourly model is applied for a more ongoing, continuous relationship; without a known scope to the engagement, the client faces a highly salient but entirely unknown, open-ended cost for an unspecified number of hours (for which technically the planner has a conflict of interest and is incentivized to drag out the advice and engagement and make every problem seem more complex than it is, to justify more billable hours and a higher fee). Some planners have tried to address this by assigning a maximum fee for the engagement, or to structure a flat total planning/project fee, but that in turn can further exacerbate the fee sensitivity issue; if the client was wary of whether their problems merit a $150/hour solution, they may be even more wary about whether their problems merit a $2,500 financial planning project fee.

In other words, the problem is not just about how much a financial planner (hourly or otherwise) charges for a service, but also how they charge and the salience of their pricing structure, and the hourly model accentuates the cost in a highly transactional manner that can undermine the desire of clients to engage, even if the cost otherwise is a reasonable value for the service provided. This is the same reason why the high-net-worth retainer model continues to struggle relative to the far-more-popular AUM model; it makes the cost so salient, it's difficult to maintain and raise retainer fees as client net worth increases, and invites clients every year to question whether the relationship is still worth the cost. And unfortunately, even if the value is worthwhile, if clients are challenged to evaluate whether the financial planning relationship is worthwhile on a continuous basis, there's a risk they will choose not to renew the relationship if there has been a lull with no planning needs in their lives.

Of course, for much of the middle class - for which the hourly model is purported as a solution - the problem is that most do not have sufficient (liquid) assets to make an AUM model feasible. Which raises the question: is there another model that can serve the middle market, encapsulate the relationship benefits of the AUM model, but avoid the high-saliency nature of transactional hourly financial planning fees and the high volume of clients they necessitate?

Monthly Retainers As The Next Big Business Model?

The key to an effective business model for the middle market is that it should be recurring in nature (to encourage ongoing relationships rather than transactional interactions), must be low-cost enough to be affordable, and ideally should present the fee in units that are "bite-sized" and comfortable enough to feel affordable as well. The solution that fits all of these requirements: the monthly retainer model, or what I like to call the "financial planning subscription" model.

The concept of the financial planning subscription model - or at least, an ongoing retainer model - is not entirely new. Some high-net-worth firms have switched entirely to retainers, or use retainers as a base for their compensation and layer an (often smaller) AUM fee on top, although those retainer arrangements tend to be paid annually (or at the most, quarterly). However, these pricing models, with higher payments at a lower frequency, are only feasible when the fees are being paid from assets - in the context of planning for the middle market, most fees will be paid from cash flow, and when we think about income and expenses, most households tend to budget and manage on a monthly basis (not quarterly or annually!).

Accordingly, it's no coincidence that some new firms entering the middle-market, and also the (overlapping) Generations X and Y marketplace, have been looking at monthly retainer models. In fact, I've specifically proposed the monthly retainer model for serving Gen X and Gen Y in the past (and there are an increasing number of financial planners now running their businesses on this basis, including Gen Y Planning, Workable Wealth, and Finance for Teachers), and it's the model currently being employed by both high-profile financial planning startup LearnVest, and was being offered by LPL's independent broker-dealer subsidiary NestWise (which has since been shut down, but not as a result of its retainers-plus-AUM business model). And I suspect this is just the tip of the iceberg for the coming explosion of the financial planning subscription model.

The advantages of this kind of monthly retainer model are significant, and include:

- Costs can be broken down to very manageable levels. Pricing as little as $100/month or less (which provides for a more palatable point of comparison, as that's less than what many people pay just for cable TV, especially when combined with their gym membership!) with a capacity of 150 clients allows the advisor to generate 150 x $100/month x 12 months/year = $180,000/year of revenue with almost no overhead. This kind of pricing can easily fit within the cash flow of far more households than lump sum financial planning project fees, especially when it must be paid from cash flow because there are no assets available.

- With today's financial technology, the monthly payment system can be entirely automated through monthly bank debits or monthly credit card charges, allowing clients to be defaulted into remaining clients each year unless they opt out, which is a far better client retention strategy that needing to renegotiate rates and ask for a check every month/quarter/year.

- When clients are defaulted into remaining clients, the advisor's focus can shift from always looking for the next transaction, to how to maximize value for existing clients. In other words, the monthly retainer model encourages advisors to "gather" clients and serve them well to retain them, instead of always being in search for new opportunities to "sell" hourly advice.

- Clients are encouraged to use financial planning. While the challenge with the hourly model is that clients are discouraged from planning (as they have to decide each time whether the problem/pain is worth the 1-2 hour cost), with the monthly retainer model clients are encouraged to do planning (you're already paying for it, you should use it!). Ultimately, this is likely to lead clients to do more planning (a plus for them!), and the more planning they do the more they can value the benefits they're receiving (a plus for the planner, and an increased likelihood they'll remain clients and refer others!).

- Allows the business to scale. The huge challenge of the hourly model for the middle market is that it doesn't scale effectively, because it's always anchored back to the payment-per-hour-of-advice which is consumed by the cost of the planner to give that hour of advice and to find more clients to serve. With the monthly retainer model, firms can focus on solutions that scale - for instance, workshops for groups of clients, newsletters and other resource/information for clients, all of which are designed to reinforce the monthly value proposition in ways besides just giving more hours of (more expensive) advice.

Ultimately, it remains to be seen which platforms will take the lead in developing and expanding upon this new financial planning subscription model - whether it's LearnVest, some alternative to NestWise, more new startup practices like the aforementioned Gen Y Planning, Workable Wealth, and Finance for Teachers, a shift in the Garrett Planning Network, some combination of the above, or some other Turnkey Financial Planning Platform (TFPP) that rises up to champion the movement - but as the potential for a full fiduciary standard looms, further undercutting the current product-based transactional model that serves much of the middle market, the future seems bright for the financial planning subscription model. As the rise of AUM over the historically transactional investment business has shown, the potential for a recurring-revenue model that effectively allows financial planning relationships to be well served is powerful, but limited to those who have liquid assets to bill upon; the monthly model can open the door for relationship-oriented ongoing financial planning to "the rest" of the market.

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