By LEVI SANCHEZ
Millennials are set to inherit trillions of dollars over the next few decades in the greatest wealth transfer in history. Tapping into this tech-savvy, social-media-driven and highly educated market of prospects is on the minds of most advisors these days.
As a millennial myself, I have insight and perspective into my generation’s needs for financial advice, tendencies when it comes to seeking advice, and mentality when it comes to purchasing goods or services. Millennials are comfortable paying for subscription services such as Netflix, Amazon Prime, Xbox Live or Stitch Fix — all billed either monthly or annually at a fixed fee. It’s simple, it’s transparent and it’s easy to understand. When it comes to financial advice, it’s no different!
The Traditional Advisor Billing Models
The traditional advisor billing models include commissions or a percentage of assets under management. Ever since I entered the industry four years ago, I haven’t interacted with many advisors who still use commissions as the core of their business. They may offer life insurance, annuities or long-term care insurance; however, products that produce a one-time commission aren’t their largest revenue driver. In my opinion, there’s a good reason why they do this, as commission-based models will shortly be nonexistent due to consumers becoming more educated about what it means to be a fiduciary and the conflicts of interest that can arise when selling commission products. Especially the millennial demographic that Googles everything before trusting it.
In addition, the AUM model typically requires a significant amount of assets before an advisor will take on a new client. At the wirehouse where I began my career, that minimum was $250,000. Most millennials don’t have $250,000 just lying around, and this reality has left a major gap in the availability and demand for financial advice.
The Subscription Model
My firm was established at the end of 2017 with the help of a network of fee-only advisors who pioneered the subscription/retainer business model. We provide comprehensive financial planning services for millennials using a “subscription” fee as one of our billing options. The subscription fee is charged monthly, and debited directly from our clients’ checking accounts. This fee covers all financial planning and investment management services.
We work with young professionals between 25 and 30 years of age. The floor for our fee schedule is $75 a month, and as clients build assets we move them to an AUM fee of 0.8 percent of assets annually.
In order to get in the door millennials who haven’t built up significant assets, the subscription model offers an opportunity to service them while still being profitable.
Why It Works From A Service Perspective
The subscription model allows you to work with people who have the “potential” to grow into AUM clients. And it allows us to grow with our clients to help build their net worth and implement healthy financial habits early.
Also, as I mentioned, many services today are offered through ongoing subscriptions rather than a one-time upfront cost. Consumers have grown accustomed to this form of billing as long as the value is ongoing.
The key is to provide ongoing value through a financial planning process that can justify a monthly subscription fee. We communicate upfront with clients that while we charge monthly, we’re not necessarily going to be in touch every month. The majority of work on the financial planning front will be conducted and implemented at the beginning of our relationship; however, as a client’s life and situation changes, oversight and ongoing advice will be required to we’re adapting to those changes financially.
In addition, we’re managing their assets on a discretionary basis, ensuring we’re tax-efficient, rebalancing when necessary and maintaining a properly diversified portfolio. Having these discussions at the outset of the client relationship sets the expectations of what they’re going to get from us, even if it’s not necessarily a monthly contact, which the vast majority don’t want anyway.
Why It Works From A Revenue Perspective
From a business perspective, it’s important to model how offering a subscription service (probably at a lower revenue-per- client basis) affects your bottom line. In our case, we modeled what would happen if we maxed out our client base with subscription-only clients, and whether we could still be in business. Our practice is virtual for the time being and doesn’t have significant overhead; therefore, we passed the test.
However, not everyone may be comfortable taking a pay cut while you wait for the “potential” in subscription clients eventually moving to an AUM fee. We also have AUM clients, and expect that base to grow as well. It’s very unlikely our clientele will only be paying for a subscription.
Again, the hope with subscription clients is that they’ll eventually build enough assets to move over to our AUM model, which typically aligns with the growing complexity of their financial situation. For every client we onboard, we’re transparent about the fact they’ll be moved to an AUM fee once they hit a particular amount of assets that we directly manage.
Millennials in particular want and need transparency in order to do business with you. Think about it — Amazon clearly gives their consumers everything they need to know about the product they’re selling you online. You can compare and contrast pretty much every product you could ever want.
Entire businesses exist that review products and services online for customers before they buy. If you’re not clearly outlining your fees, what you do, and your process on your website or in initial meetings, millennial prospects are likely to be turned off. They’ve Googled you, researched your firm or spent time asking other people about your services. Being transparent from the get-go gives you the best chance to appeal to a millennial prospect.
Why You Should Consider Offering A Subscription Fee
Offering a subscription fee opens the door to great prospects regardless of the assets they currently have.
One example is a recently graduated dentist. They may have a couple hundred thousand dollars in student loan debt, and no assets. They’re definitely a great long-term prospect, and the sooner you get them in the door and show them your value, the more likely you’ll have them as clients when they’re making a couple hundred thousand a year, stashing away $50,000 and building significant investable assets. The subscription fee allows you to get strong prospects in the door before your competition does. That doesn’t mean you have to take everyone; you can still be selective about who you choose to ultimately onboard as a client.
Millennials want direction and advice about their finances, but that direction and advice need to be accessible to them. Sure, there are a million personal finance “gurus” and bloggers out there offering information for do-it-yourselfers, but not everyone wants to do it themselves! Robo-advisors offer investment management at a low cost, but their planning expertise is still far behind what a niche planning practice can offer. Not to mention that algorithms will never be able to connect on an emotional level with clients the way a human advisor can.
Levi Sanchez is a financial planner and co-founder of Millennial Wealth, Seattle, Wash. Levi may be contacted at firstname.lastname@example.org. .