About a month or so ago, Christopher Lyman and Grant Holdren launched an experiment.
Holdren recently bought Allied Financial Advisors, a 30-plus-year-old firm in Newtown, Pa., that for years charged clients the usual 1% AUM fee.
But he discovered that the price tag was scaring away younger prospects, so the two advisors decided it was time to test out a new arrangement: a flat, monthly charge for financial planning and an AUM fee of 0.5%; a more-expensive flat planning fee with no asset management services or charges; and the regular 1% of assets managed.
“We started to get younger clients who were really balking at that fee and looking for alternative ways to compensate us,” says Lyman, whose firm has about $200 million in assets. Clients choose from the three levels of service for planning, with a slight discount for paying the entire year upfront.
It’s hardly a secret that more advisors like Lyman are reassessing how they charge for their services. Driven by everything from the commoditization of investment management to better technology, many are starting to separate financial planning from managing assets and charging for that service. Some are asking for an annual recurring or hourly fee, while others are experimenting with subscription services, usually paid monthly.
Certainly, demand for plans—and advisors’ ability to charge for them—is on the rise. In 2020, 55% of clients had a financial plan, up from 48% in 2015, according to a survey by Envestnet-MoneyGuidePro. During that time flat fees increased by about 50%, averaging $2,482, and hourly fees went up almost 25%, to $257. That’s in contrast to the AUM model where the rate has pretty much stayed the same, around 1%, for quite a while.
For most advisors, the expectation isn’t to replace the AUM fee completely. Rather it’s a way to increase revenue and, in the case of subscription models, attract younger clients who lack the assets for an AUM arrangement.
“They aren’t going back to their existing clients and replacing them all,” says George Karris, head of strategy and advisor experience at Cetera Financial Group. “They’re getting access to people they wouldn’t have worked with before.”
For example, Brian Colvert, president and CEO of Bonfire Financial in Colorado Springs, Co., added a monthly subscription service in 2019. Now, about 7% to 10% of revenues are from subscriptions, with the rest from AUM fees, according to Colvert; he thinks he could get that to as much as 25% in five years. “For clients in their 20s to 40s—that market is underserved,” says Colvert, whose firm has about $130 million in assets. “Why not be there for them, when no one else is.”
To be sure, many advisors won’t accept just any younger clients. The key deciding factor is their potential to increase their wealth down the line. Take Stephen Brubaker, wealth management advisor at ERSI Wealth Management in Centennial, Colo. About three years ago, his firm adopted a new model: As usual, accounts with over $1 million in AUM wouldn’t pay extra for planning. Everyone else would be charged a recurring annual fee of about $1,500. But at the same time, “We won’t take someone we don’t think could become a $1 million client in the future,” says Brubaker. “Over time we know they’ll grow if they listen to us.”
Technology, Staffing and Pinpointing the Right Fee
Still, charging for planning isn’t as profitable as the AUM model. Advisors who have success with it say efficient workflows and technology platforms are imperative. “Advisors need a repeatable, standardized process and a tech platform that makes it possible,” says Shannon Spotswood, president of RFG Advisory. Most advisors point to software that makes billing multiple clients relatively small amounts frequently as the most important tool. Others also cite better financial planning software, as well as programs that let clients input financial information easily and then display it on one page.
For Jamie Lima, who launched his solo firm Woodson Wealth Management just last summer, that capability is particularly useful for getting a look at all of a client’s assets and where they’re held. “Clients have to tell you where all the bodies are buried,” he says.
There’s also the matter of having the right expertise on staff. Financial planning is a different skill set than managing money. When he started experimenting with subscriptions, Colvert, for one, hired an advisor who focuses entirely on planning. Brubaker bought a firm three years ago specifically to acquire its financial planning expertise and processes.
Charging the right fee is also important. No one is going to build a thriving business around that average $2,400 one-time planning fee. Instead, many advisors use a retainer model. That means one of two approaches. First is targeting high-net-worth clients who need highly complex plans and charging a retainer of $10,000 to $30,000 and up.
The other is to charge a subscription—a fee for a plan and a monthly retainer after that. The holy grail for that model is reaching clients with high income but low assets—doctors, executives and others who earn hefty salaries but don’t have much wealth to manage. There, advisors typically charge $100 to $300 a month, but that also depends on the complexity. Lima, for example, charges $250 monthly for a basic plan and services, but $8,000 or more annually for a highly complex plan. “If you have businesses, real estate properties and significant tax needs, you pay more,” he says.
David Johnston, managing partner at Amwell Ridge Wealth Management in Flemington, N.J., has had luck with a different approach. About four years ago, Johnston, whose firm has about $150 million in assets, started charging separately for planning so that, he says, “Clients have a better appreciation for what they’re getting.” To that end, he offers a choice of paying an AUM fee only with no financial planning or an investment management fee based on AUM plus a monthly subscription rate.
But he also includes the option of what he calls “Pick Two,” through which clients pay for short-term work in two areas, like student debt reduction or insurance needs analysis, at a cost of $1,750. It’s been more popular than the subscription option, according to Johnston.
Advisors also don’t always get it right the first time around. Brubaker charged $1,000 until it was clear the price wasn’t cost-effective and he raised it by $500. When Amy Braun-Bostich, CEO of Braun-Bostich & Associates in Canonsburg, Pa, started experimenting with new approaches to charging separately for financial planning two years ago, she charged her first client a $12,000 flat planning fee. Since that was a $4 million account, she soon realized she’d woefully undercharged. Now Braun-Bostich, whose firm has about $200 million in assets, is tracking her time with a software program to see just how long the process takes and will set fees accordingly.
Spelling Out Value
Ultimately, advisors need to be able to show clients they can create enough value to make the expenditure worth it. That means being specific—presenting clients and prospects with a structured calendar, laying out what services will be provided and when. “Advisors need to determine how they are going to deliver a quantifiable experience every month,” says Spotswood—say, two video calls and one face-to-face meeting a year, a monthly email, a financial plan and monthly plan review.
Johnston displays his menu of services on his website, organized according to four life-stage categories, such as “young accumulators” and “pre-retirees/retirees.” Then, under each grouping, there’s the payment schedule for different types of fees, plus detailed services, like the number of initial, complimentary and in-person meetings a client can expect, newsletters per year they’ll receive, and resources such as a cashflow and household budgeting tool.
There’s a big question mark looming over these efforts, however: further downward price pressures on planning. For example, last summer, Charles Schwab introduced Schwab Plan, a free-for-clients self-guided digital financial planning tool. Should fees for planning drop and digitization of planning services increase, will clients eventually come to see cheap—or free—financial advice, delivered digitally, as the norm?
“If people have spent 20 years managing their finances through technology, they’re not going to all of a sudden decide they need to pay a ton of money for that advice just because they’re older,” says Samantha Russell, chief marketing and business development officer at Twenty Over Ten. “That’s a shift I think people need to be thinking about.”