Financial planning is being redefined from an exclusive benefit to one for the masses.
- Asset-based compensation models overserve the overserved.
- New models intended to serve the many are on the rise.
- Employers are getting involved with personal finance benefits.
The term financial advisor feels…exclusive. And that is not without reason. For generations, the industry was organized so advisors were rewarded for serving only high-net-worth individuals. The last decade has seen the financial advice industry reinvent itself, so now is the best time to hire a financial professional.
For most of the industry’s history, wealth managers were incentivized to serve the wealthy, using something called the assets under management (or AUM) model. It works like this: an advisor accepts two clients, Client A with $1 million to manage and Client B with $5 million to manage. The adviser provides investment advice for a fee of 1.2% on the first million dollars 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 for the advisor.
The focus of financial advisors within the AUM model is on investable assets, not holistic financial planning. So while advisors may have conversations with clients about their personal finances, these conversations are frequently seen in the light of obtaining investable assets in order to get paid for the advisor. Under an AUM model, those seeking financial planning services without the assets to back them up could be left out.
A dramatic shift toward average investors
In the last five years, however, industry attitudes have changed toward serving the average individual. Instead of charging clients on an asset basis, some advisers charge flat fees to provide a set of services. Typically, these services include a comprehensive financial plan, including some investment advice provided by their AUM-charging counterparties.
The way each advisor approaches their fee structure differs, but often these flat fee structures are more practical. For example, a flat fee advisor may serve Client A with $1 million in assets and Client C with no investable assets. The advisor can charge $2,000 for a single comprehensive financial plan, regardless of the client’s wealth. In this way, Client A and Client C will receive the same service for the same price, and it is not recommended that the advisor caters only to the high net worth person – the rate will not be different for them!
It’s hard to overstate the effect of the flat fee model in democratizing the financial planning industry. Now, those who did not meet the minimum requirements to enter an AUM advisor’s office have access to the same level of financial expertise.
Financial wellness programs
One of the biggest changes in the industry is the availability of financial wellness programs for core employees. In the past, financial advisors were offered as an executive-only benefit. Now, employers in a variety of industries are opening their doors to financial advice for all of their employees.
Workplace financial wellness programs can take a variety of forms, including bringing financial planners into the workplace, offering financial seminars, and deploying a suite of technology resources. In addition, employers may offer access to a 1-800 line for financial advice, as well as free or discounted services with an outside financial planner.
If your employer offers financial planning services, take advantage of them. Employers love to see employees use their resources, and the services could go a long way toward securing your financial future. Finally, recognize that financial wellness programs are a part of the growing democratization of financial services as they move from serving the few to serving the many.