Financial planning is being redefined from an exclusive benefit to one for the masses.
- Asset-based compensation models overserve the overserved.
- New models aimed at serving the many are on the rise.
- Employers are getting involved with personal finance benefits.
The term financial advisor feels…exclusive. And that’s not without reason. For generations, the industry was organized so advisors were rewarded for serving only high net worth individuals. The past decade has seen the financial advice industry reimagined, making now the best time ever to hire a financial professional.
How it was
For most of the industry’s history, wealth managers were incentivized to serve the wealthy, using something called an Assets Under Management (or AUM) model. It works like this: An advisor takes on two clients, Client A with $1 million to be managed, and Client B with $5 million to be managed. The advisor provides investment advice for a fee of 1.2% on the first $1 million of investable assets and 1% on assets above that amount. Client A is charged $12,000 per year while Client B is charged $52,000 per year. Client B, by virtue of having more assets, is a much more attractive client to the advisor.
The focus of financial advisors within the AUM model is on investable assets, not on holistic financial planning. So while advisors might have conversations with clients about their personal finances, these conversations are frequently viewed in the light of drumming up investable assets for the advisor to be paid on. Under an AUM model, those seeking financial planning services without the assets to back it up might be left out in the cold.
A dramatic shift toward average investors
In the past five years, however, industry attitudes have shifted toward serving the average individual. Instead of charging clients from an asset base, some advisors charge flat fees to provide a suite of services. Typically these services include a comprehensive financial plan, including some investment advice provided by their AUM-charging counterparts.
How each advisor approaches their fee structure differs, but oftentimes these flat-fee structures are more hands-off. For example, a flat-fee advisor may serve Client A with $1 million of assets and Client C with no investable assets. The advisor may charge $2,000 for a one time, comprehensive financial plan, regardless of a client’s wealth. This way, Client A and Client C will receive the same service for the same price, and the advisor is not encouraged to serve only the high net worth individual — the fee will be no different to them!
The effect of the flat-fee model to democratize the financial planning industry is hard to overstate. Now, those who didn’t qualify for the minimums required to walk into an AUM advisor’s office have access to the same caliber of financial expertise.
Financial wellness programs
One of the larger shifts in the industry is the availability of financial wellness programs for rank and file employees. In the past, financial advisors were offered as a benefit only to executives. Now, employers across a variety of industries are opening their doors to financial advice for all of their employees.
Worksite financial wellness programs can take a variety of forms, including bringing financial planners to the worksite, offering financial seminars, and rolling out a suite of technological resources. Additionally, employers may offer access to a 1-800 line for financial advice, as well as free or discounted services with an external financial planner.
If your employer offers financial planning services, take advantage of them. Employers love to see employees utilizing their resources, and the services could go a long way toward securing your financial future. Finally, recognize that financial wellness programs are one part of the rising democratization of financial services as they shift from serving the few to serving the many.
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