The hallmark of every successful business or brand is a willingness to adapt to changing times. In the financial services industry, reports and studies have found that younger people approach investing and financial planning much differently than their parents and grandparents. Millennial and Gen Z investors prefer robo-advisors to people, want to communicate digitally vs. phone calls or in-person meetings, and would prefer to use a fee-for-service model instead of paying a percentage of assets under management (AUM).
Between 2023 and 2045, the silent generation and baby boomers will transfer approximately $84 trillion to Gen Xers and millennials. If financial advisors want to remain competitive amid the “Great Wealth Transfer,” they must adapt by adding new services and capabilities.
Financial advisors can diversify their practices while providing additional downside protection by offering fee-for-service financial planning services. According to Cerulli, more than 70% of heirs are likely to fire or change financial advisors after inheriting their parents’ wealth—and advisors can make inroads into this cohort by expanding the scope of their offerings.
AUM advisors may fear that clients will complain about paying out of pocket for a previously included service. However, since fee-for-service financial planning isn’t replacing an existing service—it’s adding to a firm’s overall capabilities—advisors shouldn’t feel the need to apply a blanket approach to fee-for-service planning.
Here are three ways advisors can incorporate fee-for-service financial planning into their larger practices:
Day-Forward Approach
For advisors wary of charging existing clients via a new
out-of-pocket fee structure, offering fee-for-service financial planning only to new clients is a viable approach. That way, current clients remain under the existing fee structure, avoiding disruption while you also build solid foundations with new clients who will be in an excellent position to add investment management as they continue to amass wealth and progress in their careers.
Firmwide Fee-for-Service
For advisors offering fee-based financial planning to both new and existing clients, it’s essential to communicate what the plan encompasses. Under this approach, all households currently engaged in planning services receive advanced notification regarding the firm’s shift to a new fee model. Well in advance of the scheduled conversion, clients are provided with detailed information about their current fees and a breakdown of the proposed fees post-conversion.
For advisors already offering some form of financial planning, it’s essential to clarify the services included in the existing AUM fee and explicitly outline the financial planning you have been providing at no cost. Emphasize your commitment to delivering increased value and the comprehensive way in which you’ll address every facet of their economic lives. This may include retirement planning, college planning, tax planning, budgeting, estate planning, Social Security strategies and more.
Many clients conflate financial planning with investment management, so it’s important to distinguish between the two. Emphasize that financial planning is an equally important — yet often overlooked — aspect of the advisor-client relationship.
Annual-Review Transition
Many firms adhere to an annual review cycle for client meetings. These meetings present an opportune time to introduce the proposed fee-for-service model and a defined timeline for implementation. Similar to the firm-wide conversion strategy, the goal is to include all clients in the fee-for-service model. However, unlike the simultaneous transition in the firm-wide approach, the annual review conversion method adopts a gradual rollout. This approach mitigates the challenges associated with transitioning a large number of clients at once. Most financial planners align fees to client income, with the going rate at 2% to 2 1/2% of a client’s gross income for annual fee-for-service engagements.
For advisors, offering fee-for-service financial planning provides a consistent revenue stream even in a down market, and fee-for-service financial planning software can pay for itself with just one or two financial plans. And since financial planning and investment go hand in hand, advisors who offer holistic financial planning can further expect to grow their AUM more than threefold.
In life, change is the one constant. Professionals who are flexible and willing to adapt their business models to appeal to a changing customer base are setting themselves up for lasting success.
Alex Sauickie is chief executive officer of AdvicePay, the leading platform for processing payments and overseeing compliance of fee-for-service financial planning.
