Stuck On The Middle

This past fall, I had the privilege of speaking once again at my favorite conference in the world—Back2Y—hosted by Paul Armson in Birmingham, England. This conference draws life-focused advisors from around the world seeking to deliver the highest order of value and the highest level of integrity to their client relationships.

Two of the speakers at the event, Bob Veres and André Novaes, shared commentaries and stories about the future of the financial planning profession that we would all do well to ponder.

Veres is a leading journalist in the financial planning profession, whom I’m guessing most of you are familiar with. Novaes is the founder of LifeFP, a unique financial planning enterprise based in Brazil that is turning the traditional models of compensation on their heads. I suspect you’ll be hearing much more from and about Novaes in the future.

The thoughts shared by these two leaders point to the glaring omission in the financial planning universe—the underserved middle class. Veres brought down the gavel on this matter with the statement, “I know of no other profession that won’t serve 90% of the population. We can’t be that profession.”

The omission is traceable, in my mind, to two factors inextricably knotted together: 1) advisors’ compensation from assets under management; and 2) advisor value propositions that are vacuous and vaporous. If I am a planner with the AUM compensation model, I cannot afford to serve your interests unless you have sufficient investable resources to compensate me for my efforts. In other words, I can only help you increase your wealth if you already have wealth!

What would you think of physicians who would only see you if you had already tested healthy? Or lawyers who would only represent you if you were already proved inculpable?

I may be wrong, but it seems to me I’m seeing more and more people in the middle class walking around with bad teeth, and I suspect it’s because American dentistry has priced itself out of much of the market. The rise of “dental tourism” in Mexico, Costa Rica, Vietnam, etc. speaks to this phenomenon. Is financial planning on the same trajectory?

I’m not saying you have to cater to the middle class, but I am saying a great cohort must step up for financial planning to be taken seriously as a “profession” instead of a luxury service for the already entitled. The bald truth is that instead of catering to the most in need, this profession caters to those most able to pay.

Compensation Sensation
We are in the early stages of a tectonic shift in compensation, however, moving toward a more inclusive model. Years ago, we witnessed a similar shift away from commission-based payment (a trend that’s still in progress) toward one based on AUM. At the time, everyone thought this was the magic bullet to solve all compensation complaints. They were shortsighted in their enthusiasm.

I once found myself at a national conference sitting on a panel discussing the compensation shift. Most of the panel were talking up the virtue of the AUM model. I presented them with the following analogy:

“If I was buying a house and was offered the option of paying an up-front commission on the house or paying 1% of the house’s appraised value for the entire time I lived in the house, I think I might opt for the former.”

As you can guess, the analogy was not greeted warmly by the AUM advocates. But I wanted to advance the idea that one day compensation tied to AUM would come under question just as commissions were at that time. It was just a matter of time before the consumer advocates would turn their searchlights toward the 1% “golden calf.” That time is now upon us.

To quote Bob Veres once again, “AUM is just commission in drag.”

To take the home-buying analogy one step further, it seems that today’s tenants have another option: association fees. Instead of paying up front or paying a percentage in perpetuity, we can simply pay an appropriate association fee commensurate with the services received. This seems quite reasonable for those who desire the services but don’t have the assets to satisfy the asset limits. This model will work for extending the financial planning profession to the masses until the “association fees” themselves become onerous.

Subscription fees for service are the latest trend—and the discussion about them is just getting warmed up. Schwab, through its Intelligent Portfolios, is beginning to prove the point by delivering the service via subscription fees. So is the XY Planning Network with its efforts to help planners build a subscription-based business.

Blueprint For The Future
If I told you I knew of an advisor whose firm was charging his clients just under 5% of their income for a life-focused financial planning service, and that his client list had grown from 0 to 5,000 in 12 years—in a country of 230 million people where less than 2% (approximately 5 million people) make more than $10,000 per year, I’m pretty sure you’d think I was making up this story. But this is, in fact, the story of André Novaes and LifeFP in São Paulo, Brazil. He told me he would define the middle class of Brazil as those making $12,000 to $13,000 a year.

How does he do it? Simple. He actually bets the prospective client that his firm can prove its worth in three months and offers a money-back guarantee. And then his firm goes about the tightly orchestrated process of changing lives with wise and proper financial decisions (note that I didn’t say changing portfolio values).

As Novaes told us at Back2Y, “Caring for humans is at the center of the proposition’’ for his business, something communicated by its process and people. He is straightforward and factual in his assessment of how the model works, the take-up rates, the attrition rates, etc. The beauty of the model is that its weighted value has nothing to do with investible assets, amount of assets or rate of return on assets. It has everything to do with helping people use their money wisely, educating clients, and helping them get the best out of life with their money. Today, LifeFP has 62 planners serving its clientele.

While advisors in America are trying to hang on to 1% AUM fees with newfound value justifications, LifeFP is charging clients almost 5% of their incomes, and they are gladly paying it for one simple reason: The value is real and felt daily because it is a life-centered value proposition, not an asset-centered proposition.

Novaes reminds me of a prophetic voice crying out in the financial wilderness and calling the profession to examine itself before judgment falls in earnest. You’ll be hearing more of him in the years to come, and you’ll see this model echoed around you sooner rather than later.

The great “what if” here boils down to the value you bring to the life of the client, and whether you articulate that value in a way that keeps resonating. If your stated value-add is to produce a comprehensive financial plan, then what more advantage is there to the client paying $50,000 per year with $5 million in AUM than there is for the client paying $10,000 because they have $1 million? Is it really that much more “comprehensive?” Pat your planning complexities on the back all you wish, but you may find yourself having trouble convincing those in the know in the days to come.

Another issue with the typical financial plan is that the labor is front-loaded, and the subsequent dialogues revolve largely around revisiting the original work. It takes savvy clients about two to three years to figure this out, and when they do, they will start questioning the compensation model.

As we ponder what’s happening and speculate where all this is heading, we find that we’re really left with three choices:

• Keep charging less and join the race to the bottom (good luck with that).

• Provide more substantive and sustainable value that cannot be commoditized and continue charging assets under management fees to compensate.

• Provide more substantive and sustainable value and move to a subscription model that has the potential to adjust upward as client needs warrant it.

If financial planning truly wants to be regarded as a profession, it must examine these accessibility issues that are the result of its dearly held compensation biases. Not everybody needs a physician, but those that are sick do. There are a lot of people out there who need help—and are willing to pay for it—but the model doesn’t invite them in for treatment. We can change that.

Mitch Anthony is the creator of Life-Centered Planning, the author of 12 books for advisors, and the co-founder of ROLadvisor.com and LifeCenteredPlanners.com.