In the age of Netflix and Spotify, it’s no surprise people are looking for a flexible approach when it comes to accessing financial services. Entertainment, software, and even Costco all use the subscription fee model. It’s a pricing structure that also appeals to those who occasionally want access to an expert to help them keep their finances organized.
On this Elementality podcast, Reese and Chad look into the fee-for-service trend and how it is changing financial services. Young professionals are building their assets and want access to financial guidance when it comes to making pivotal life decisions. Are subscription fees the answer? And can they be balanced with traditional AUM fees that have driven money management for decades?
Show Notes:
The New State of Advice
Failure to Understand Younger Investors Could Affect Advisors’ Ability to Attract Clients
Podcast Transcript
Reese Harper:
I don’t know exactly how many people need to rapidly get into this kind of subscription future. And it is hard to get there. It’s possible that the whole financial planning market in 10 years, that this finally crushes [inaudible 00:00:22] fees. If there is 50 different active management platforms for 75 basis points and 50 basis points and 25 basis points and their technology is better and their user interface is better and they work with advisors and advisors can use them. At some point, the cost of managing money is just going to be compressed. And then you’re going to have to say, how are people going to want to access the thing they still want. Which is this human touch, this personalization.
Jordan Haynes:
Welcome to Elementality. I’m Jordan Haynes, financial planning specialists at Elements. In this episode of Elementality, Reese and Chad, talk about how advisors can adapt their fee and service models to accommodate an emerging market of younger clients. And how these clients are demanding a higher value proposition centered on comprehensive financial advice instead of solely investment management. As you listen, consider where you see your firm in the future and what is needed to satisfy the desires of your current and your future clients. Enjoy the episode.
Reese Harper:
Welcome to Elementality everybody, excited for another episode here in the studio with my good friend, Chad, appreciate you taking the time to carve out of your schedule, amidst a lot that you have going on. We’ve got a lot of good things that have happened this last few months. We’ve got some really cool adoption into our progress reporting system. I’ve made some really big headway on Android, and we’ll actually be launching our web product later this year. And we’re really excited about that. We’ve definitely been making a lot of progress recently and super excited about the adoption that we’re getting from advisors that want to implement a planning process.
Reese Harper:
We found recently that a lot of people who are leaning into this subscription economy are kind of finding their way to us as well. I was reading an article this week from Accenture and it led me down this rabbits hole of how big is, is the subscription economy going to be part of wealth management at some point? And it led me to a J.D. Power article that was from earlier, just a few months ago. And the quote was that people under the age of 40, 73%, I believe was the statistic, said that they preferred a subscription based pricing model.
Chad Jardine:
Actually preferred it.
Reese Harper:
Preferred it. I had seen stats before, in maybe the forties and 50 percentile. I don’t know if the robo advisor kind of investment management fee compression, all the tech platforms, I mean, Titan vest, I don’t know if any of you guys saw titan.com that just launched in the last few months, but they’re an active management robo advisor. So for 1% a year basically, you can get actively managed crypto exposure to a variety of styles of active management. It’s an active platform, not a passive management platform, like your wealth fronts.
Reese Harper:
Seems like the investment market, and that was a, it’s already, if I’m not mistaken, it’s a billion dollar valuation already or more, and it’s only less than a year old. So with all this fee compression on investment management seems like there are a lot of people also saying, “Hey, I want access to this holistic advisor still.” The Accenture article I was riffing on earlier, it mentioned that only 17% of people wanted a purely digital experience. So very few people want purely digital experience.
Chad Jardine:
What’s an example of a purely digital experience?
Reese Harper:
Well, Wealthfront right now is a purely digital experience.
Chad Jardine:
Because I’m handling all of my investment management and through digital interface it’s no humans.
Reese Harper:
No humans. Yeah. Some places like Vanguard, or other platforms, will have some kind of human supported digital experience.
Chad Jardine:
Yeah. So it’s a hybrid of [crosstalk 00:04:45] manual and digital.
Reese Harper:
And strangely on the opposite side of the spectrum though, 17% of people also said that they preferred a purely human experience. You have 17% saying digital, this is the Accenture article we’ll try to get Abby to reference these in the show notes on the website. I’ve got them published so they’ll be easy to find. But the other extreme, we’ve got 17% that is saying, I want just human. I’m tired of this whole technology thing.
Chad Jardine:
And your two thirds in the middle are saying that a hybrid [inaudible 00:05:18].
Reese Harper:
Two thirds are saying, I want self-service and a little bit more ability to interact with my tools and see my stuff and tinker with my data. But I also want a human.
Chad Jardine:
Yeah. That’s fascinating.
Reese Harper:
So they’re saying that, and they’re also saying they want holistic kind of comprehensive, trusted advice across their whole picture. Not just investing. So you’re seeing investment management fees getting compressed. You’re seeing people say I prefer a hybrid experience and you’re seeing them say, I want to access this hybrid experience through a subscription. [crosstalk 00:05:56].
Chad Jardine:
This was people under 40, right? 73% under 40, is that right?
Reese Harper:
Yeah.
Chad Jardine:
And as opposed to what, they prefer a subscription to as opposed to…
Reese Harper:
To an AUM model. Now, people under the age of 40 also don’t have a lot of AUM. So are they saying that because they don’t have any access to [crosstalk 00:06:24] the M, the A? They can’t access an advisor with that. Or are they saying it because they don’t like the value proposition of, as I invest more money, you guys get paid more.
Chad Jardine:
Yeah. Well, and it does feel like that lines up with the sort of everything as a service economy. We subscribe, there’s a certain piece of mind that comes with knowing that, okay, I pay this subscription and what do I get? I get always access. I always have it when I need it.
Reese Harper:
All that being said, I think that was my experience at Dennis Advisors as well. I mean, we were trying to go down market. We found that we could access people earlier and more profitably through subscription than we could just a strictly AUM business model. But the hybrid of those two things actually made the model sing to where we could be profitable. We could actually add more value, add more services, and people want, they want to pay 195 a month, or 295, or 495 or three, or 99, they want to pay 50 bucks a month. But they don’t like what 50 bucks a month feels like, right? If they really knew what kind of service they were going to get at that price point, that’s what’s interesting to me is that we’re not a pure subscription model at DA because candidly, we’re using subscription as a way to get it down market.
Reese Harper:
But we can’t afford to work at the rate that the customer’s willing to engage at so early, right? If we were to price this in a truly fixed fee model, you have to wait until people are older and they have more cash flow. And then they say, “Yeah, you know what? I’d like to pay a higher rate, lock it in, never pay more.” But they want access earlier. They want help earlier. They want support earlier. But their tolerance to pay is not very high on subscription. Their tolerance for subscription is there. But the band is, it’s still a percentage of income usually that they’ll have a tolerance for. And it’s one to one and a half percent, you’re going to get 2% of income, probably not. There’s a limit to where people are going to actually say, I will buy an advisor at this price.
Reese Harper:
People that have assets, there’s two types. There are people that say, I want to fixed fee and I’m willing to pay up to lock it in. And there’s people that say I’ll pay something and I’m willing to pay you on my investments because I don’t really mind paying something on my investments. If it means my subscription payment can be lower and I could access you earlier. And yes, I know I’m going to over pay you over time. And I know one day you’re going to make a lot of money when I’m really rich. [crosstalk 00:09:19] They don’t care as much as they do about the hundred dollars or $200 today.
Chad Jardine:
In that model, people have something to shoot for, right? It’s like, okay, I’m shooting for the time that I graduate out of subscription payments [crosstalk 00:09:34]. But as a practitioner, if advisors are sitting around only serving people who have sort of graduated to the level that they can profitably be served under AUM, there’s a demand for their service in a whole demographic that doesn’t meet the AUM qualification. So if there’s a way that you can, like you were saying at Dennis Advisors reach down market and serve them. Then we also know that they don’t switch very often, right?
Jordan Haynes:
Do you ever wonder if you do enough for your clients to be worth what they’re paying you for? Do you feel like you’re delivering enough value? Many advisors wrestle with questions like these. I’ve used the Elements Financial Planning System for a couple years now. With it, I can deliver periodic insight about a client’s financial health and progress by utilizing standardized measurements. They know I’m watching their progress and can actually see how my advice is improving their life. With the Elements Financial Planning System, you can also give your clients’ consistent planning guidance and the valuable advice they expect. Check it out at get elements.com/neat.
Reese Harper:
You’re capturing people in a more profitable model. It’s also the way they want to engage. You won’t capture them if you wait until they have money, because they’ll go somewhere else. I’m going to get them. If you’re are willing to engage down market and capture the customer earlier, you’re going to hold that customer and their tolerance for paying you on an AUM basis is actually, they do have tolerance for that. Once they know you, once they feel comfortable, once they’ve established a relationship and they’re like, man, it’s just a lot easier. I know I have to pay more to access them. But that’s part of the value proposition you sell up front. You just say, look, we manage all of the money, that’s why we’re willing to engage you at such a reasonable price.
Chad Jardine:
If I’m an advisor, let’s say I’m like, look, I don’t want to go through the headache of working with people that don’t have money. I’m going to enter at the top of the market and just work with people that have enough money to where I can, charge AUM. What’s preventing that from being the most common model for new advisors?
Reese Harper:
Well, it is the most common model and it’s a feeding frenzy at that part of the market. That’s why the cost of customer acquisition’s so high. I mean, it costs a lot to acquire customer because you’re stealing a customer from someone else. You’re not acquiring that customer. I met yesterday with a really, someone in their late thirties for lunch and they had opened a wealth front account. And I’m just telling you guys this is coming, okay, this is the future. You may not believe it right now, but it’s going to happen. This person, they’ve been motivated enough to go and meet with wealth managers four times in the last five years, because reasonably high income, I don’t know exactly. But it’s in the high hundreds or low twos probably, must be my guess based on the role and the company that they’re at.
Reese Harper:
He opened a wealth front account. It’s been, I think it’s probably been five plus years now. And that account continues to get more funding. He’s consolidated from multiple robos that he tried, down to one that he liked the user interface better. And he’s met with four financial advisors and hasn’t felt like the value proposition’s been adequate for him to pay more. And I think that is what you’re going to see. I see that a lot. And it’s because the value proposition has to be planning centric. It’s to be bigger than just investment management. And if it’s bigger than investment management, you can convert the customer. If it’s more holistic, you can convert the customer. But if it’s, I charge more because I’m better, then that investment management option, then you’re not going to convert the customer. And that’s what he told to me. He’s like, I just felt like none of them really were that comprehensive, I think is the word he used, in what they were covering.
Reese Harper:
He’s like maybe if they were doing more tax planning, or doing more estate planning with me, or helping me with my kids college, and I was just thinking, I know every one of those people that you met with does that. And all four of them would say, I do that. I can’t believe you’d catch it. He’s like, I just didn’t feel like there was any planning and I showed him Elements and I showed him the app and he is like, “Oh, what’s that?” He’s like, “No one showed me anything like that before. Well, if they had that and they were doing this, then maybe I would consider it.”
Reese Harper:
I’m like, well, would you want for it through your investments or through a subscription? And he’s like, “Well, depends.” And he’s like, “How much investments would I have to have to work with someone?” And I said, “Well, it would just be a subscription that you could afford right now. Or you got to wait to work with someone later.” He’s like, “Well, I’d rather access it now on a subscription.” And I said, “Well eventually, would you want to not pay that if you had enough money to cover it.” And he’s like, “Yeah, I don’t want to pay it eventually when I have all the enough money.”
Chad Jardine:
But it made sense to him to get access now. They say that the future’s already here it’s just not very evenly distributed. And that really resonates with me. It’s like, if you want to see what’s coming, it’s out there, you just look around, it’s already here. It’s just not common yet. And so that story makes a lot of sense, right?
Reese Harper:
I don’t know exactly how many people need to rapidly get into this kind of subscription future. And it is hard to get there. And it’s possible that the whole financial planning market in 10 years that this finally crushes AUM fees. If there is 50 different active management platforms or 75 basis points, and 50 basis points, and 25 basis points, and their technology is better, their user interface is better and they work with advisors and advisors can use them. Like at some point the cost of managing money is just going to be compressed. And then you’re going to have to say, how are people going to want to access the thing they still want? Which is this human touch, this personalization. And my guess is that most of the people at the low end of the market are going to say, I’m fine paying a subscription to access them if I can access them earlier.
Reese Harper:
And once I have lots of money, I’d rather pay for it through my money. Because I’m rich. But those people already have advisors right now. And we’re seeing that no wealth is being transferred to the next generation in any kind of meaningful way. I talked to the same guy at lunch, I said, because his dad’s quite successful, and I just said, “When you inherit all your dad’s money, what are you going to do with it?” He’s like, “Well, I’m definitely not going to leave it with the guy that he’s with.” And you just brought that up out of blue.
Chad Jardine:
So that brings up an idea. We’ve been talking a lot about catching clients at different moments in their life cycle, whether it’s age, or the amount of wealth that they’ve, the net worth that they’ve amassed, whatever. Is there are a relevant way of talking about where advisors are in both their lifespan and in the life cycle of their business. If I’m a young advisor, does it make more sense for me to adopt an aggressive subscription approach because I’m actually laying the groundwork for a future?
Reese Harper:
Yeah. I mean, I think that’s kind of the underlying rub here and where we find that we’re the platform where the future is going, but there’s plenty of people that are saying, “I know that John’s not going to leave me. And I don’t care about [crosstalk 00:17:58].
Chad Jardine:
I’m three years away from retirement myself…
Reese Harper:
I don’t care about whether the money stays with the firm. There’s a lot of self interest in not migrating to the future. Because all we’re talking about here is, you have to deliver more value than you’re currently delivering. That’s painful. And the only people that are really interested in doing that are the people that are trying to attract the clients who are requiring more value.
Reese Harper:
And people who are comfortable, older clients who are fine, there’s not an urgency to sort of go and give more value to that customer because that customer’s not demanding it. And the advisor’s making a good living and they’re just saying, ah, it’s fine. But the bigger firms care. But like if you’re a sole prop firm with, it’s just your boutique option. I don’t really feel like there’s a high sense of urgency for someone to say, it’s time for me to reinvigorate my whole firm. And you see that in the insurance industry, somebody’s selling annuities and they’ve always sold annuities. They’ll keep selling annuities, even though the whole market knows those things are dying, you know? At least they’re not dead, but the commission and the margin in them is getting stripped out. Great question.
Jordan Haynes:
Next time on Elementality…
Jim Crider:
With the limited information I had, I ran as fast as I could towards that yet had open hands enough to say, if this takes me somewhere different, let’s go there. But I’m not going to sit here on my laurels and wait, I’m going to pursue it and be willing and able to pivot as well. So that’s what I’ve done every time. Hey, do I want to get my CFA or my CFP? Oh, I want to go my CFP, bam. Let’s attack it. I got my CFP fast. Do I want to move, stay at Fidelity, or go to firm that can have more in depth. I’m going. So I just ran for it. Again, do I want to start my own firm? Or I want to sit back. Well, one of the top regrets I heard in all those podcasts was I wish I would’ve started this sooner. I started as soon as I could. I left my old job and started this thing two weeks before I had my third kid and my wife stays at home with the kids. I could’ve have done this faster.
Jordan Haynes:
You can learn more about the Elements Financial Planning System at getelements.com/meet and schedule a time to meet with me or one of our friendly financial planning experts. Elementality’s Executive Creators are Reese Harper and Chad Jardine. Elementality is produced by Abby Morton and directed by Jordan Haynes.