Time for a Change
The Financial Planning industry is evolving from the traditional assets under management, AUM model, where you would pay a financial advisor a fee usually 1% of the assets that the advisor manages.
This model has worked well for many years mostly because of the complicated nature of stock markets, and not as much access to low-cost choices such as exchange-traded funds (ETFs). The internet has changed all of this and has opened the door for new possibilities.
With the rise of the retail investor using platforms such a TD Ameritrade, this has essentially democratized the process and has enabled the average investor, with some confidence, to trade ETFs on their own. Besides, with the millennials looking for low-cost target-based funds, essentially one ETF, this has made these options even more appealing.
Along comes a new approach which is very timely given all of what I wrote above, the subscription or retainer model of financial planning. In this model, you would not pay your financial advisor 1%, but a fee for service, which can be paid either monthly or quarterly. The investor would then be given guidance on a suitable portfolio to pursue to achieve their investment goals. This model is both simple and very appealing for the average investor. Some of the benefits compared to the traditional AUM model are highlighted below:
Higher Customer Service and Accountability: With the subscription-based model the client is paying each month or quarter directly out of his or her pocket. While with the AUM model the fee is debited from the investor’s account. Which approach would you demand greater customer service from your advisor, a fee you don’t typically see or a fee that comes right out of your pocket each month?
More affordability and Transparency: The typical AUM model has a 1% fee for AUM of $500,000, this would equate to $5,000 a year. While a subscription-based model typically is much lower running from $125 to $300 per month. In my firm, for example, you would be paying $125 per month or $1,500 per year for comprehensive financial planning. Wouldn’t you want to pocket the extra $3,500 and do the investments yourself with the guidance of your financial planner? This seems like a lot of money just for your financial advisor to rebalance mutual funds, usually with automated software.
Increased Education to Empower Investors: I’m a big proponent of educating and empowering your clients. We do a disservice when we don't explain things to our clients and after meeting with them, they are even more in the dark. Financial planning is a trusting relationship and education is key to establishing and building upon trust. I believe that investors should be empowered to make investments on their own with their financial planner’s guidance.
With our digitally interconnected society, empowering investors to be able to use modern technology to make better investment decisions is our duty as financial planners. I think it is time to radically change the industry and make financial planning achieve higher customer service, more affordability, and empowering and educating clients. I hope you can join me on this mission.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
