Executive Summary
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.
Michael,
I think that the “subscription model” is something that my peer group (Gen Y/Millenials) is very used to and almost expects as an option at this point. I’ve found that an upfront fee for the initial consultation followed by the option of a monthly retainer has been received well, in part because it provides an opportunity for both the advisor and the client to get to know one another prior to signing up for an ongoing relationship. Most people wouldn’t agree to date someone for a year (or even a month) without going on at least one date, why should choosing a professional be different? Also, I think the financial benefits of the subscription model are extremely well documented in the Tech space and I see no reason why the model won’t work just as well in our industry.
This is very topical for me, Michael. I’m an hourly planner now, but plan to add a flat fee (retainer) service in the new year. I was planning to bill flat fee clients quarterly but see the benefit of an automated monthly transaction.
Fee transparency with the hourly model is a real hurdle. Many of my new hourly clients have no idea what they have been paying for “advice” that comes in the form of commissions (or even AUM). It’s a mental shift for them to have to write me a check, but they get it once I show them how their old advisor was charging.
I think your argument is valid about the perceived high cost of the hourly rate. I’ve had to explain that my hourly rate covers all the expenses related to my business including taking time out of the office to attend conferences for my clients’ benefit.
I hope to build a core group of flat fee clients and continue to offer hourly services to those who truly have a limited scope. The limited scope folks have very limited fee-only options.
This is actually something I’ve given a lot of thought to as I’ve considered how to set up a part-time financial planning practice of my own. My thought has always been to charge a flat rate that includes either a certain number of meetings or a certain number of months and then offer an ongoing relationship for a monthly fee. One of the things I like about this model as well is that it doesn’t unnecessarily raise the cost of planning simply because someone increased their wealth. I think it can really be a win-win.
Good thoughts. From my personal experience of offering hourly, AUM and monthly retainers, the one issue with monthly retainer (without ongoing investment management) is the ongoing pressure to do something each month for the client. After the start of a plan, this may be pretty easy as you are holding them accountable to doing the items that needed to accomplish, after that I have found it difficult at times for monthly retainer clients to feel “satisfied” each month. This isn’t an issue with AUM as you are seen “doing something everyday” for the client by managing their investments and with hourly it is a direct cost for a particular service at the moment.
I’ve found once the fee is above $50/month clients are more mindful about “what are you doing on a regular basis for me” mentality. I have some folks at $100/month, but again there is a good bit of pressure to do something each month, since I don’t manage the investments. People with a fee of $40/month (I no longer charge this low, due to large volume of clients required to make this a viable practice) – $60/month tend to not feel this way. The issue is at 150 clients * $60/month the gross is over a hundred with net income likely slightly under $100,000. With these types of numbers I am brought back to seeing 50 clients at an average of $400,000 @ 1% annually or $200,000 gross as a more efficient practice. Ultimately, I like a spattering of hourly, retainer and AUM, but a word of caution, leaning towards $100/minimum would be recommended for retainer planning.
I’ve been charging a flat fee monthly retainer for clients for 4 years and it’s been working for me so far. I started out this way when I opened my door in late 2009. My clients are “middle market” clients in the Washington DC suburbs. They range in age from early 30’s to late 60’s. First year fees are $300-450/month for comprehensive planning and investment management; subsequent years’ fees are based on the level of service that a specific clients seems to need, and range from $150-$300/month. It matters less the amount of assets I manage for them and instead I focus on the time and expertise I am providing each client. My clients set up automatic bill pay at their bank and I’ve recently started setting up direct debits from their accounts at my custodian if they’d like. As others have noted, it smooths out the cost of the plan. We have more ongoing planning and more interactions than “typical” firms might offer, yet I don’t find my clients abusing my time. I try to manage expectations by letting clients know how often I would expect to meet and what services they would receive from me for a specific fee level. It works and I feel I am providing value to my clients.
I have a variety of models in my business although no monthly flat fee. I have attempted to find a partner since I started to offer classes in the model of weight watchers. I believe you discussed a number of years ago, a financial planner partnering with weight watchers with a similar intention. It seems to me the group model leveraging group process supplemented with individual services would work well for both a monthly classes/workshops and billing model. The education/group process offers a monthly opportunity value as well as offering advice and options to achieve financial/life goals. I am still trying to find a partner in SF Bay Area. Any interested contact me.
Ira Fateman
Michael, the startups you mention are late to the party! Bert Whitehead and the Alliance of Cambridge Advisors (ACA) have operated on a retainer basis for 2 decades or longer. I am sure that Bert and other members of ACA would be happy to give you more insight into the process.
As I read through this post, I couldn’t help but think of the value commissioned financial professionals provide. While many RIAs or “fee-only” financial planners scoff at the merits of these professionals due to “conflicts of interest” or motives for their advice, we overlook the fact that planning recommendations often require the purchase of a financial product to achieve the desired outcomes. Commissioned advisors have the ability to offer “free” advice and help the middle market client purchase a tangible product to follow up on that advice. Middle market consumers can justify the purchase of a financial product in their minds and the commission would be viewed as a byproduct of that transaction. It is much more difficult to do so when we have to justify the valiue of a service- especially when consumers don’t know what financial planners usually charge to begin with. However, in the financial planning relationship, we ask the client to compensate us for our knowledge and value. What I’m saying is that consumers can justify value in a product easier than they can in the advice of an individual. Insurance companies, banks, and mutual fund companies, have used this model for generations with the middle market because it works. It is also why independent insurance agents can “service” so many clients. Financial planning suffers from the elitist nature of its offering- saying someone who knows more than you to tell you what to do with something that you worked hard for. The value of good financial planning cannot be understated, but to be effective in the middle market financial planning should be marketed as a “product with immeasurable benefit” rather than “a service for a fee.”
Thanks for the informative post
Michael – I loved the article and your newsletters, especially surrounding FINTECH. For this article though, I have a question: I recently went through an “issue” with my B/D and was specifically told that the SEC does not allow advisors to charge a retainer. Further, I was told that if I didn’t provide a service to a client, I had to refund the fee charged to the client for that specific period (let’s say quarterly). Under that scenario, if I charge a retainer and promise to meet quarterly; if my client and I don’t meet in given quarter, I’m required to return the fee for that quarter. Have you had any experience with this? I’m confused.
Thanks much!
Andy,
This must be a specific interpretation of your compliance department. It is most definitely NOT an SEC rule.
There is an expectation from any regulator that in order to charge fees, you do SOMETHING to provide value for the client. But a face-to-face in-person meeting is not the only way to provide value. Just witness the number of firms who manage client portfolios on an ongoing basis – whether for an AUM or retainer fee – and infrequently meet with clients.
But to answer your direct question, no there is not any law that says “you can only charge a client a retainer for a time period if you had a face-to-face in-person meeting with them.” There is still a market expectation if you charge people on an ongoing basis that you do SOMETHING for them to validate your fee, of course…
In XY Planning Network, we now have over 260 advisors doing this monthly retainer model, all as independent RIAs subject to the Investment Advisers Act of 1940. It’s quite legal. 🙂
But bear in mind, technically when you work as a broker-dealer, YOU ARE NOT IN THE BUSINESS OF ADVICE. You are in the business of product sales, legally. Your advice must be solely incidental to the sale of brokerage products, or you would be required to register AS an invesmtent adviser. So there IS an issue for broker-dealers of saying you’re NOT in the business of advice, and then charging retainer fees for advice. But that’s not a rule against charging retainers or giving advice; that’s a rule limiting brokers to ensure that the ones who give advice are actually registered to do so… (even if the SEC poorly enforces it – see https://www.kitces.com/blog/is-the-sec-failing-to-enforce-the-solely-incidental-advice-exemption-for-broker-dealers-under-the-investment-advisers-act-of-1940/)
– Michael
So glad to have one of the first to deploy this model in 2008 and have been doing it for 12 years. We were way ahead of our time!!