Maybe financial planning isn’t all it’s cracked up to be. Sure, it’s been held out as a “must have” service, especially during down markets. (The theory is that offering financial planning services is supposed to prevent disgruntled clients from asking investment professionals during down markets, “What exactly do you do for me except lose me money?”) But it turns out financial planning doesn’t really give advisors a leg up in winning new clients or generating revenue.
So says a recent Aite Group survey of 400 advisors across all advisory channels. The advisors were segmented into five categories based on how much they focus on financial planning. According to the research, those who viewed investment management as more important than financial plans generated more revenue and had more assets per client than those who placed the greatest importance on financial plans. “Investment-focused advisors are clearly in a league of their own with respect to their financial performance in terms of both assets and revenues per client. The high asset per client ratio implies that they have deeper client relationships than do advisors in other groups,” the report says.
More specifically, 37 percent of investment-focused advisors generated more than $500,000 in revenue in 2008. In the same year, investment-focused advisors brought in, on average, $718,000 in assets per client and made $4,900 in revenue per client account. Meanwhile, slightly fewer of those advisors who are “planning-driven” generated more than $500,000 in revenue in 2008: around 31 percent. These so-called planning driven advisors—who say planning is more important than investment management and offer financial plans to more than half of their clients—brought in, on average, $557,000 in assets per client, and generated $2,900 in revenue from each client. Only 27 percent of planning-selective advisors—those who say planning is more important than investment management, but have plans in place for fewer than half of their clients—generated more than $500,000 in revenue in 2008. On average, they brought in $527,000 in assets per client, and made $2,900 in revenue from that client.
On the other hand, planning-selective advisors tended to have the most high-net-worth and ultra high-net-worth investors as clients compared with other groups. About 37 percent of the clients of planning-selective advisors have at least $1 million in assets, versus 35 percent of investment-focused advisors and 23 percent of planning-driven advisors. And 15 percent of the clients of planning-selective advisors have at least $10 million, versus 12 percent of the clients of investment-focused advisors and 8 percent of the clients of planning-driven advisors.
“It’s interesting that there are still many advisors whose businesses are mostly focused on investing only,” said Sophie Schmitt, senior analyst with Aite Group and author of this report. “A lot of these advisors view financial plans as a time suck. Investors come to these investing pros because they have a successful track record—not because they want a financial plan.” She continued, “The report isn’t advising that financial planning isn’t worth the effort or that advisors shouldn’t do it. There is a huge group of mass affluent investors that benefit from financial planning.”
Barry K. Mendelson, founder of Capital Market Consultants, a Milwaukee-based consultancy, says investment management may simply tend to attract greater talent than financial planning. “Financial planning is critically important maybe now more than ever. This downturn showed people that. But investment management is much more captivating and involves a different kind of talent to get it right. It’s sexier and it simply captivates people,” he says.
RIAs represent the biggest firm-type in the investment-focused category. A quarter of RIAs are investment-focused advisors. Compare that with 17 percent of wirehouse advisors who are investment focused, and 16 percent of independent broker/dealer reps.
Philip Palaveev, president of Elmsford, NY-based Fusion Financial Network, compares investment managers and financial planners to plastic surgeons and general practitioners. “It’s probable that plastic surgeons are making the most money but that doesn’t mean general practitioners are less valuable or less successful,” he says. And while investment managers might be deemed more financially successful, their revenue generation is also more volatile. “Investment managers live by performance and die by performance,” he says.
Bob Kresek, managing partner of Founders Financial Network, a Cupertino, Calif. RIA, is one advisor who would fall into the planning-driven category, but it seems to attract relatively high-net-worth clients. Kresek has created financial plans for over 90 percent of his 100 or so clients, each of whom has investable assets of about $5 to $8 million. Kresek says he believes in laying out clients’ goals first, but that doesn’t mean he’s less serious about investment management. “We don’t have a crystal ball and we don’t know what he world will bring. But we do know that if we do it this way, then client have a high probability of doing well,” he says.