Attracting and maintaining next-generation wealth management clients will require significant changes on the part of advisors, including how they price their services.
The average age of wealth management clients now stands at 64, according to data from global consulting firm Simon-Kucher & Partners. While most firms want to bring in younger investors, they are often using traditional asset-based approach to fees, which has “boxed the industry into a corner,” the firm suggests. As minimum asset requirements rise, younger clients are being left out in the cold.
“There are two groups of advisors, old world advisors and new world advisors,” says Matthew Jackson, a director with Simon-Kucher & Partners. “The old world advisors are more like product salesmen, they make money off of transactions. So for them it’s a case of getting as many clients through the door as possible and making as many sales as possible.”
The second category — new world advisors — charge upfront fees based on assets rather than transactions.
But there is yet a newer module that Jackson says he’s seen emerging on a smaller scale, where advisors are breaking away from the AUM fee structure and charging dollar fees, such as a monthly or yearly retainer figure, or a percentage of income.
“The reason this is a good idea is partly because there is so much pricing pressure on the horizon from people who have figured out how to charge super low fees as a percentage of assets under management — robo advisors being the famous example.”
While many advisors talk about building a book of high-net-worth clients, the reality is that most of the younger generations aren’t at that level of wealth.
“It’s just plain silly,” advisor Randy Bruns of Model Wealth in Downers Grove, Illinois, says of using the AUM fee model with younger clients. “On one end you have millennials with serious financial planning needs, and a pricing structure that cannot serve them. And on the other end, you have clients paying tens of thousands of dollars just because they’ve saved well. Less wealthy consumers are penalized for having not yet saved, and wealthy consumers are penalized for decades of saving. It’s so strange. And it can lead to some terrible advice as well, simply because of conflicts inherent to the AUM pricing structure.”
In a recent report — “Nothing to lose: Pricing for the Next Generation of Wealth Management Clients” — Simon-Kucher argues that the current fee model is the main reason the industry has had limited success acquiring younger clients. Moreover, any assets they might possess are often illiquid and offset by considerable debt.
Additionally, the services financial advisors offer tend to go beyond wealth management, so it may be helpful to figure out a fee structure that can incorporate these as well.
“There are all sorts of things advisors do for their clients, which are not really to do with asset management,” Jackson notes. “This could be as simple as having someone who knows [the client] and who [the client] can call if [they] just have a question about something, not even necessarily financial … That is a lot of additional value on top of the ability to get returns in the stock market.”
Some advisors have begun taking this into consideration and have started launching new strategies to help younger clients.
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“I launched Beyond Your Hammock, a fee-only RIA in 2013, focusing specifically on clients in their 30s,” says Boston-based advisor Eric Roberge. “As such, I had to build a non-AUM structure since most 30-somethings either don't have assets, or don't have assets outside their 401k plan.”
Roberge offers his clients a monthly subscription model, which he says is really an annual planning fee that is paid monthly. This structure, he says, allows for ongoing financial planning work.
“In the most successful cases, we can use clients' six figure incomes to save and invest over several years and then go from the monthly subscription, to a hybrid, to a full AUM relationship,” he says. “This allows me to work with successful young clients before they have wealth and coach them to successfully grow it. There's not much competition from the advisory world, as no one knows how to work with [these clients].”
Kaleb Paddock of Tens Talents Financial Planning in Parker, Colorado, is another advisor that sees the benefit of more than one price offering. His firm offers three pricing options, first, flat fee financial plans that range from $1,500-$6,000 for a limited 3 month engagement. Second, ongoing monthly agreements where clients pay a monthly price ranging from $149-$549 for an initial financial plan and then ongoing planning guidance throughout the year. Third, the classic AUM model where he charges 1% on the first $500,000 managed and then 0.50% on any amount over $500,000.
“The benefit of this pricing structure is that it offers a flat fee service option to pay out of current cash flow for clients who haven't accumulated millions of dollars of investments, but are employed making healthy income,” Paddock says. “However, if they inherit money, grow their investments over the years, or otherwise prefer to pay for financial planning more traditionally via AUM, that service offering is available to them. But it's their decision.”
