Executive Summary
It has long been a criticism of financial planning that it is focused to far up the wealth scale. Financial planning firms at best only start serving the "mass affluent" (typically defined as $100,000 to $1 million in investment assets), and the elite independent firms often have minimums of one or several million dollars. The only exception is typically the younger high income earner, who may not have sufficient assets yet, but earns a few hundred thousand dollars a year, is accumulating assets quickly, and may need significant income tax planning support in the meantime. Yet the statistics show that the average American doesn't even have $100,000 in investment assets, and nearly half of Americans don't pay income taxes at all.
The response from planners is that it's just too difficult to serve clients at those lower wealth and income levels; the business model "doesn't work" and isn't viable/profitable. Yet perhaps the real reason is not that the business model is impossible to design, but simply because it's so hard to get a sufficient volume of clients, due to the sad reality that the value of financial planning hasn't been clearly defined to the public at large, and as a result it's very expensive to "sell" clients on financial planning when there's no real demand from them to "buy" it in the first place.
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?
Designing A Financial Advisor Business Model For The Mass Affluent
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 100-150 client relationships, the idea of bringing in 1,000 clients per year is daunting, to say the least!
The Marketing Challenge And Impossible Client Acquisition Costs
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, and doing so at a cost-effective price point that doesn't bury the business model in too-high client acquisition costs.
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. Marketing in volume requires a scale that very large financial services firms have, but the typical independent advisor does not. 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 at a reasonable cost of client acquisition.
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 the mass affluent actually seek out the services of a financial planner. This allows financial planning service model to be implemented that serve the masses, because the firms will have to spend less time (and cost) on 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 client acquisition cost and a 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?
