Fee-Based Planning: A New Model For A New Era

By Jeff Magson

Regulatory unrest, digital innovation and growing wealth within new generations are pushing financial advisors to innovate their services and reassess their fees and costs. Tried-and-true models that base compensation on assets under management or commissions from investment products are quickly losing favor with a new kind of investor ― one who values a personalized, multi-dimensional, long-term approach that goes beyond transactions or AUM.

Generation X and millennials have begun to amass substantial wealth by building their fortunes, inheriting money from their parents or grandparents – or in some cases, both. Even though the Department of Labor fiduciary rule was struck down in court, these clients still expect their financial advisors to take a fiduciary approach and act in their clients’ best interest.

These younger generations have grown up under a completely different set of consumer dynamics than the baby boomers did. Digital innovation is creating pricing pressure across all areas of the American economy and personalized service is expected at every touchpoint. These younger generations often value quality over price and are looking for technology tools to make their lives easier.

Many financial advisors are quickly adopting a fee-based planning approach in order to adjust to the preferences of these clients. The fee-based planning model is based on the idea that both the advisor and client need to think about the client’s investment and financial affairs, as well as their values, goals and dreams.

This shift may seem overwhelming or intimidating to some advisors. But the good news is that adopting a fee-based planning model can open the door to new opportunities to serve this new contingent of clients.

Shift The Focus To Year-Round Access

Today’s clients often look for year-round access to their financial advisor to help them navigate life’s changes and market fluctuations, and keep their focus on long-term goals.

Traditional service models based on commissions can be short-sighted because they focus on the advice given on the day of the transaction, not over the lifetime of the investment. It’s a similar story for AUM-based advisory relationships. Advisors meet with a client face-to-face each quarter or once a year to discuss investment performance and adjust asset allocations if needed.

Both of these models limit client engagements to infrequent meetings. This can be overwhelming for clients because there are often a number of decisions that need to be made all at once. These models also constrain the type of advice financial professionals can offer year-round or when a life event occurs. Annual conversations limit opportunities for behavioral coaching. They also limit advisors’ ability to help clients avoid common mistakes such as procrastination, distractions, or the irrational exuberance of stock market rallies and falls.

Fee-based planning models can enable advisors and clients to take advantage of several touchpoints throughout the year. This can include dividing decisions across all four seasons for example, which helps to decrease client feelings of being overwhelmed and ensures the advisor is taking the client’s entire financial picture into account.

Adopting a fee-based approach helps to adapt to the changing needs of clients throughout the year and shifts the focus from short-term to long-term.

An Opportunity For Multi-Dimensional, Personalized Advice

Today’s clients are looking for holistic wealth management services that align with the high-touch digital world in which they live. Many are seeking solutions to meet their multi-dimensional financial needs under one roof. These needs may include estate and tax consulting, insurance analysis, retirement planning, investment strategies and more.

The fee-based planning model can allow clients to pay a financial advisor a one-time fee or ongoing retainer fee in exchange for a comprehensive financial plan, plus guidance with implementation and an agreed-upon service model. Instead of a fee based on a percentage of AUM, the agreed-upon fee is based on the complexity of the client’s situation and the level of financial planning engagement they will receive from the financial advisor.

Although these types of client-advisor relationships have existed for some time, new technology tools and advisor-tech solutions have enabled greater personalization and augmented multi-dimensional advice for everything from aggregation accounts to creating goals-based financial plans. All of these enable advisors to deliver a higher level of service and reinforce the advice they offer.

Meeting the needs and expectations of today’s clients requires advisors to adopt a new approach. Instead of simply managing assets or facilitating transactions, advisors can open the door to more meaningful discussions focused on long-term, personalized goals through fee-based financial planning. This model allows advisors to adapt a client’s financial plan as their life changes and can generate new sources of growth by building even stronger client relationships.

Jeff Magson, CRPC, is an executive vice president and the client experience officer at 1st Global. Jeff may be contacted at jeff.magson@innfeedback.com.

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