Pricing is becoming a major issue for planning firms. While AUM works well with wealthy boomers and subscription fees seem to appeal to millennials, how do you find a happy medium matching the value you deliver with a fee that still keeps your clients happy?
On this episode of Elementality, Reese Harper and Chad Jardine take a look at the future of AUM and retainer fee models. Managing client portfolios doesn’t carry the value it used to and finding the right fee structure for traditional planning—which takes many hours of work each year—can be difficult.
Before making a pricing decision, consider your current client base, then the types of clients you want to attract in the future, and finally which fee models will best help you serve all of your clientele.
Podcast Transcript
Reese Harper:
Investment management used to be the primary value proposition. Now all this technology’s disintermediated that space, brought the value proposition down slightly for the role of an investment manager. You’re not doing as many things now as you used to be able to do, so the value is a little bit lower. So what is the immediate consequence of that? Well, something else has to rise in value as investment management starts to get compressed. And what was that? That’s financial planning, financial coaching, all the other financial jobs to be done that need to be accomplished, because investments were only one of the jobs, and financial planning has like 100 different types of jobs.
Jordan Haynes:
Welcome to Elementality I’m Jordan Haynes, financial planning specialist at Elements. In this episode of Elementality, Reese and Chad talk about the future of the assets under management and retainer fee models and the role each serves in capturing the opportunity to attract clients that are willing to pay for planning but may not have the assets to do so. As you listen, consider how your current client base and the types of clients you want to attract in the future and how these fee models may help you serve them more effectively. Enjoy the episode.
Reese Harper:
Welcome to another episode of Elementality, everybody here in studio. Excited today. We have a great topic Chad has prepared for us that I’m about to discover, and looking forward to this one.
Reese Harper:
Chad, what’s the latest in advisor land?
Chad Jardine:
All right. So the way you ask that assumes that I know what I’m talking about. I just want to reiterate to everybody that I do not, but I appreciate… I’ve actually-
Reese Harper:
He plays the incompetent sidekick, but he’s actually very seasoned, so people see through that.
Chad Jardine:
I’ve learned a through lot in the last few months, and it’s been a super exciting journey to just watch what’s happening, to be able to interact more and more with financial planners and talk to them about how their business is working. So even though I still feel very much a novice, I feel like I’m coming up to speed. I’m starting to understand the tribe a little better, and what an amazing, what an amazing group of people and incredible service that you all provide.
Chad Jardine:
So speaking of service, that relates to the question for today. We’ve been talking about really billing models and different types of fee-for-service structures. And so I’m just curious if you… Talk to me a little bit about what you’re seeing in terms of people that are charging subscriptions for planning. Is that a mix of a type of, of billing that you’re seeing? Or is it more binary, like people are, you know, doubling down on one type of billing or another? [inaudible 00:02:57] lots of questions about this. Is this attached to certain types of clients? Is it attached to certain ways of delivering planning? Anyway, subscriptions. Let’s talk about subscriptions.
Reese Harper:
Looking at this from a high level, I would say that the general trend that everyone would be able to say, “Yes, this is happening,” to is that investments used to be the primary value proposition of what financial advisors delivered, is they manage client’s money, literally like an intermediary broker to product.
Chad Jardine:
Investment management was really the umbrella service that planners were providing.
Reese Harper:
Yeah. And if you look at the technology stack that supports investments right now, advisors are investing somewhere between probably 8 and $15,000, maybe more, per advisor on investment-related administrative and compliance and trading and billing and portfolio performance reporting, and there’s a lot of investment-related software, because that’s where the industry value proposition was historically. Well, now all of the things that we used to do 15 years ago, 10 years ago, those are being disintermediated by technology, with a lot of platforms that have started out thinking they were going to go direct to consumer, like a robo platform.
Reese Harper:
Take Betterment, for example. They started out with an intention to go direct to consumer, but found that advisors were a better distribution channel, so their technology then got leveraged into the advisor community. And they just said, “Okay, fine. It seems like advisors are the ones that would value this.” And it brought efficiency to advisors’ practices. And now people that use, let’s say, Betterment’s platform, they don’t have performance reporting that is a separate piece of software. They don’t have separate billing software. They don’t have… It’s just-
Chad Jardine:
Kind of a detour for them. They set off on this course with the idea in mind that consumers will want to use their software [crosstalk 00:05:15] do their own investment management, but they get down that road and find that the consumer by and large doesn’t want to do that.
Reese Harper:
Well, I think as time goes on more consumers will probably continue to feel more comfortable, but it’s a very small market. It’s very ahead of where the bulk of the assets are in the world. These platforms like Betterment are charging 25 basis points or 50 basis points, and they make money when people have money. And if people don’t have money, then they don’t make a lot of money. And so who’s willing to use those platforms? It’s younger people with less assets. It’s people that are more comfortable, more forward-looking. Even the 40- and 50-year-olds and especially the 60-year-olds and 70-year-olds, where the bulk of the assets under management live, they weren’t as willing to just pivot and shift and get rid of their relationships.
Chad Jardine:
Would you say that that was like a demographic miss for them?
Reese Harper:
Well, I just think technology is one of those things where you’re usually leading, you’re usually very forward-thinking, and you don’t know how fast your market is going to respond to-
Chad Jardine:
Yeah, of course.
Reese Harper:
-your advancement in technology. We’re seeing this with Elements right now, where we launched primarily on allowing an advisor to manage their entire book on a mobile device. And for some of our raving fan customers right now, that is our big value proposition, is they’re like, “I can manage my book while I’m traveling, while I’m on my phone. I can look at my client’s data. I can be on the phone with my client, they can enter data live, and I can enter data, and we can literally have a call, and I can just be at the grocery store and knock it out in five minutes. And I don’t have to schedule an appointment. I don’t have to…” That is really working for some of our customers.
Reese Harper:
Other customers are like, “I don’t like typing with my thumbs,” or, “I don’t want-”
Chad Jardine:
Yeah. Too much change all at once.
Reese Harper:
Too much change. And so that’s why we have web coming, and that’s why we have physical reports, and a lot of things that people are like, “You know, I’m with you on where it’s going, but I’m still-”
Chad Jardine:
Not quite there yet.
Reese Harper:
“-not quite there yet.” And so the whole point that I’m making is, investment management used to be the primary value problem position. Now all this technology’s disintermediated that space, brought the value proposition down slightly for the role of an investment manager. You’re not doing as many things now as you used to be able to do, so the value is a little bit lower. So what is the immediate consequence of that? Well, something else has to rise in value as investment management starts to get compressed. And what was that? That’s financial planning, financial coaching, all the other financial jobs to be done that need to be accomplished. Because investments were only one of the jobs, and financial planning has like 100 different types of jobs.
Chad Jardine:
And so trailing on that shift is where you’re also seeing the shifts in billing models.
Reese Harper:
Yes. So then you look at where the billing models are at, and it’s like, well, if people have a lot of money, then you can just start doing financial planning on an AUM basis, and it’s fine. But if people don’t have as much liquidity, then you’re starting to see innovation in subscription fees or fixed fees, because when people don’t have assets they can pay with cash instead of paying with AUM. And it’s kind of interesting to me that…
Reese Harper:
I was talking to Michael Kitces about this this week, and he launched a service to target this part of the market that was charging either fixed fees or subscription fees in a compliant way. And it’s growing really fast, but it’s still a very small market, the market of people actually saying, “Hey, you know what? I want to go into the blue ocean. I want to go into the part of the market where advisors have not ventured to go.” Because historically… Like at Dennis Advisors, when I first started, we didn’t have subscription pricing. We just had traditional AUM pricing. [crosstalk 00:09:32] charged a fixed planning fee to start. This was like ’07, ’08, ’09, 2010.
Chad Jardine:
And was your planning fee an annual fee, a monthly fee?
Reese Harper:
Just a one-time upfront fee to do the plan, and then we managed the money. That was where we were at. Today we’re on entirely… Almost every client we’re getting pays a subscription fee, because we’re going down-market. And then as they have more assets with us, then their subscription gets discounted. Eventually it’s gone, and they continue to pay with AUM. But people… It takes time to build up those investment balances.
Jordan Haynes:
A big challenge for advisors is delivering a consistent, ongoing financial planning experience to clients. Knowing what to do initially with a client is easy. But how do you consistently add ongoing value to strengthen that new relationship? The Elements Financial Planning System is centered on key indicators of a client’s financial health, and it gives you the structure you need to deliver ongoing value through financial planning. Start by evaluating key client financial data, then deliver timely insights that are both valuable and appreciated. To learn more, schedule time to talk with us today by going to getelements.com/meet.
Chad Jardine:
Yeah. Well, it feels like something that maps better to the lifespan of the client too, right?
Reese Harper:
Yes. [crosstalk 00:10:50].
Chad Jardine:
The client doesn’t start out with… It’s not like you’re born and you have a giant pile of assets.
Reese Harper:
No. I was meeting with a financial advisor on Elements, one of our customers, yesterday, and he was showing me a sample… He put in some sample data for a client. He didn’t disclose the name to me, but he showed me their stats. And he was just showing me what an average 31-year-old customer looks like. And they haven’t been able to service this customer in the past, because they didn’t have enough assets. But with this new technology that we’ve built, they’ve been able to go down-market and figure out, “How can we make 2000 a year? How can we make 1500 a year? How can we make 3000 a year?” And capture them earlier.
Chad Jardine:
When you’re saying they haven’t been able to service them, what I am hearing is, they haven’t found a way to make any money on them. So it’s-
Reese Harper:
Yes. Because they have been traditionally only an assets under management shop, and so they’ve never actually been able to say, “Well, what if the client was willing to pay before they had assets?”
Chad Jardine:
And you would think that that client at some point in their life will have assets.
Reese Harper:
Yes.
Chad Jardine:
But the opportunity to capture them… If that client goes somewhere else and then builds up their asset base, it’s not like they’re coming back to give you another shot at them.
Reese Harper:
No. And a lot of times even if they do… Number one, as anyone listening to this knows, the cost of switching for a client is very high. They don’t like it. And so that’s why retention rates are so good in this industry. We’re 90 plus percent retention rates on our customer base. And so you’re not going to steal a client from somebody else very often. You’re going to likely get new ones. That’s why there’s a lot of book acquisition, because you can buy a book, but it’s difficult to steal a client. Like stealing clients is hard, buying books is easy, and then getting new clients is easier, way easier than stealing a client.
Chad Jardine:
Yeah, well maybe… By stealing, what you’re saying is… It’s really enticing to switch.
Reese Harper:
Yes.
Chad Jardine:
The client decides.
Reese Harper:
Ultimately the client decides. Stealing a client is a strong way of saying marketing to get someone to switch.
Chad Jardine:
[Crosstalk 00:13:03] maybe how get it feels like if you’re an advisor [crosstalk 00:13:08].
Reese Harper:
Ultimately the client does decide.
Chad Jardine:
What did you do? I stole their will to make a different decision.
Reese Harper:
So to bring this full-circle, where I’m seeing the future go is, I don’t think… People used to think assets under management billing was dead. I now feel like it might be in 40 years, but-
Chad Jardine:
If it death blow has been dealt, it’s going to take a long time to expire.
Reese Harper:
Yeah. Because if it was going to die right now, I still… I’m looking at Dennis Advisors’ growth, and a lot of our other firms that we have as customers at Elements. It’s like a lot of these firms are still thriving in the AUM model. It’s just, what kind of customer is attracted to the AUM model is usually someone that’s wealthier with a pile of money and they’re just ready to… They’re like, “Yeah, I don’t care what your cost really is. I just don’t want to deal with all this stuff.” That’s the customer that the AUM model really works well for.
Chad Jardine:
Got to find somebody with some A [crosstalk 00:14:12]
Reese Harper:
They don’t have any… If you want have any UM, yes. And so if you look at the opportunity, I think, the market, the advisory market right now really only services probably like… I mean, let’s just say real service. Let’s just take the CFP, say there’s like 90,000 or 100,000 in the country, and say that each of those could manage like 100 households, which is probably not the average, because most of them are probably having less than 100. And so if you have 10, that’s 10 million households that they can maybe service out of 120 million households. And the reason that that’s the market right now…
Reese Harper:
And I think every advisor listening would say, “If I could just raise my hand and have a bunch of clients come onto my platform or join my firm, I would love that, but I have to go find them. I’ve got to sell them. I have to market to them.” I think that there’s more… People saying there’s a scarcity of advisors out there. I’m like, “I don’t know.” If there was a scarcity of advisors, then you’d assume there would be massive demand from clients.
Chad Jardine:
You’d feel the-
Reese Harper:
You’d feel it.
Chad Jardine:
You’d feel the the pressure from-
Reese Harper:
I think you could say that there is going to need to be maybe one day, but I think that the truth is that financial planning is just something that the customer doesn’t understand very well, and subscription fees allow the advisor to go down into the market where people may not have literacy yet of what financial planning is or understanding kind of say, “Yeah, I’d like to try this out, but if you don’t have any assets to manage, then it’s really not possible.”
Reese Harper:
So I kind of feel like the future of financial planning will probably continue to be a combination between AUM and subscription, but the growth is really going to be in this subscription-oriented arena, because everyone who already has assets or is already wealthy, there’s already plenty of planners to service those people in a traditional model.
Chad Jardine:
It sounds too like if I’m a financial planner and I want to try to future-proof my business, I got to find some way to get people attached to me before I can actually afford to work with them on an AUM model, so subscriptions opens that up to me. I can now reach down into of the younger market, capture them. I know that my attrition’s going to be low. If I have two financial advisors and they’re both running to grow their practices, the one who’s able to find a method to reach down, and subscription is becoming that, the one who can reach down and bring in younger clients who the other one is going to say, “Well, I can’t afford to service them on an AUM basis…” The one who’s AUM only is going to get left in the dust.
Reese Harper:
If someone’s standing at the door willing to pay, why turn them away? That’s the way I see it. Why turn them away? If they’re willing to pay, just take the payment they can pay, and you can capture that asset client. Those AUM assets will be there with you as time goes on. You’re just reaching down a little bit earlier, and you’re going to be able to have a more thriving practice.
Chad Jardine:
That makes a ton of sense. It makes a ton of sense. Also, can I just take a moment and give a shout out? About two or three minutes ago, you can scroll back if you want, that was Reese Harper doing math in his head. Reese Harper, everybody.
Reese Harper:
[inaudible 00:17:58].
Chad Jardine:
[inaudible 00:18:00] the market. I got this many CFPs. I got this many households. [crosstalk 00:18:06]. I’m impressed.
Reese Harper:
Well, it’s a good conversation today. Thanks, Chad. And we’ll look forward to catching up with everybody in a week.
Jordan Haynes:
Next time on Elementality.
Chad Jardine:
So the shift that happened for me, though, was I went from thinking I was a hero, like my job is to solve their problem, I’m here with this cape on, or our firm is, and we come in and we just save people, and I realized that instead… Kind of translates to you in the mountains. It’s like instead, I’m getting hired by the family to be their guide for this journey that they’re on. And at the end of the day, they have to know where they want to go. We have to know what resources and capabilities they have. And then we have to look at what’s the best thing we can do to make the best of this experience.
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.