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* But Fortunately, Times Are Changing (Quickly)
People who have access to a financial advisor have better financial outcomes. Charles Schwab conducted a survey of the financial behaviors of people who work with a financial planner compared to those who don’t.
The results for people who work with a financial advisor are encouraging.
- 75% pay their bills and still have enough to save money each month.
- Two out of three have an emergency fund.
- 62% have life insurance
- 38% live paycheck to paycheck.
The results for those who do not work with a financial advisor are alarming.
- 33% pay their bills and still have enough to save money each month.
- Less than one out of four have an emergency fund.
- 39% have life insurance.
- 68% live paycheck to paycheck.
Working with a financial planner to develop and execute a written financial plan leads to considerably better results.
There is just one problem. Most financial advisors have no incentive to work with you unless you’re rich.
My Concerns with the Assets Under Management Model
The traditional model for how a financial advisor gets paid is determined by the amount of “Assets Under Management” (AUM) their clients have. Under this model, financial advisors don’t get paid directly by their clients. Instead, they take a percentage of the investments they manage on behalf of their clients. It’s not uncommon for advisors to charge 1%-2% of the value of your investments each year.
Say you had $500,000 in retirement savings that a financial advisor is managing on your behalf. If the advisor charges a 2% annual fee, they would make $10,000 each year.
Some advisors provide a discounted fee as you cross certain thresholds for Assets Under Management. Some common thresholds where discounts apply include;-
- $100,000
- $500,000
- $1 million
- $2.5 million
- $5 million
Using the Assets Under Management business model, there is no financial incentive for a financial advisor to even speak with anyone with less than $100,000 in investable assets.
A recent poll found that the average person would consider $19,800 to be a “life-changing amount of money”. While at the same time, a financial advisor would consider that to be next to nothing. A 2% commission on $19,800 would only amount to $396 in annual revenue to the advisor. At that rate, an advisor would need over 126 clients to make even $50,000 per year.
If an advisor works with a client who has $500,000 to invest, they could make up to $10,000 in revenue from a single client. The advisor could make 25 times more money working with a client with $500,000 than a client with $19,000. It’s easy to understand why the financial services industry wants to work with high net worth individuals.
The Sad Irony of the Assets Under Management Model
Many financial advisors get paid through the assets they manage on behalf of their clients. However, good financial advisors provide a host of services and advice on a wide range of topics. Here’s a list of some of the issues a financial advisor might help their clients with.
- Maximizing benefits provided by an employer, including making the most of a 401(k)
- Filing taxes
- Buying life insurance
- Buying disability insurance
- Planning for current and future healthcare costs
- Buying the first house (how much house do I need?)
- Selling a house for the first time
- Financially planning for kids
- Buying a new home
- Saving for retirement
- Divorce
- Bankruptcy
- Starting your own business
- Selling your business
- Retiring
- Death of a spouse
- Living off your savings
- Estate planning
The life events listed above have one thing in common; they have nothing to do with the amount of money the advisor is investing on your behalf.
These life events present difficult choices that might impact a person’s finances for decades. Unless you have enough money for an advisor to manage, you might be making them on your own.
People with $19,800 to invest need the same level of financial advice as someone with $500,000 to invest. Sadly, the people with the least amount of money and the smallest margin for error are having to navigate their financial lives on their own.
We need a new Financial Planning Model
There are a growing number of financial planners moving away from the “Assets Under Management” model and moving towards a “fee-only” or “fee for service” model. This involves charging a set fee that is charged per hour, per job or on a monthly subscription fee.
If this model became standard practice in the financial services industry it would make professional financial advice accessible to the people who need it most.
When you pay an advisor to provide advice rather than manage investments, the advice provided is tailored to the individual client’s needs. As simple, low-cost index ETFs continue to grow in popularity more and more people are comfortable with being a DIY investor.
There will always be some that are willing to pay for professional help managing their investments but as our life and careers get more complicated, people need help managing all areas of their financial lives.
In a previous article, I discussed how financial stress is impacting our mental health. In that article, I reference a report that outlines 8 personal finance topics people would be willing to pay for professional help with.
- Knowing if they’re paid fairly
- Maximizing their salary at their current job
- Planning career moves that earn them more money
- Monthly budgeting, right-sizing their debt
- Planning affordable vacations
- Dealing with the spending pressures that status anxiety exerts
- Having someone to talk to holistically about their financial life
These are all things that keep many people up at night.
How great would it be to have someone to talk to about how you can ask your boss for a raise. What if someone was willing to sit down with you and teach you how to use travel rewards to travel for less money. Wouldn’t it be great to have someone to talk to about what is stressing you out in your financial life?
As great as this sounds there is still one major problem created by the fee-only model; The fees would likely be too high for average people to afford. To get a fee-only financial advisor to create a financial plan for you would cost anywhere between $2,000-$10,000.
Most people can’t afford that, and we get the same result, only rich people get good financial advice. This brings me to a third model for financial advice.
Financial Advisors Using the Retainer Model are Reaching an Untapped Market
A growing number of advisors have realized that those who can’t afford a financial advisor under the Assets Under Management and fee-only models are an untapped market. Under a monthly subscription or retainer model presents an advisor would charge a fixed rate either monthly or annually in exchange for access to financial advice. The advisor might also charge a larger one-time fee to set up the financial plan with a smaller retainer fee moving forward.
For example, an advisor might charge a client $1,000 -$2,000 to build the initial financial plan. Once the plan is built the heavy lifting is done but the client will likely have lots of other questions, they would like to ask their advisor. So, in exchange for a monthly or annual fee, the client has access to the advisor whenever they need advice.
The benefit to the client is obvious. They get unbiased financial advice at an affordable price.
The benefit to the advisor is that they can build a stream of recurring revenue from their existing clients.
If I ever decided to get back into the financial services industry, I would likely do so under a retainer model. There are millions of people who desperately need financial advice but can’t afford it. I can’t think of a more rewarding business than to help those who need it most.
About the Author
Ben Le Fort
In the eight years following graduation, he paid off all of the debt and built a seven-figure net worth. Ben holds a Bachelor’s degree in economics from Acadia University and a Master’s degree in Economics & Finance from The University of Guelph.
Ben lives in Waterloo, Ontario, with his wife, son, and cat named Trixie.
To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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