The financial planning profession, once again, is at an inflection point — and the winners of the last revolution may end up the losers when this one runs its course.

A new revenue model has emerged that is more closely aligned with the interests of the client. It also happens to open up a financial advisor’s service to a much broader ocean of younger and less wealthy clients. You should probably be paying attention.

To back up: We all know that the profession was born out of sales. Brokers and insurance agents straightforwardly sold their investments and policies for a commission, with a perfunctory look at a client’s circumstances — usually so they could overcome objections effectively.

Then, at the dawn of the financial planning era in the early 1970s, a rebellious band of salespeople pioneered “needs-oriented selling.” They would quantify, with at least a modicum of objectivity, what their clients needed to buy — be it load mutual funds, limited partnership tax shelters or cash value life policies. They even recommended cheap term insurance and sold load mutual funds on the side.


Of course, these pioneers were castigated and ridiculed. The International Association for Financial Planning (a predecessor to the FPA) was referred to, with a snicker, as the International Association of Failed Producers. But when the brokerage firms, broker-dealers and insurance companies saw that the pioneers were more effective at winning customers, they created their own versions of needs-oriented selling, recommending products under the aegis of a financial plan.

In the late 1980s, a small band of rebels broke free once again, creating the fee-only revenue model based on assets under management — and more closely aligning their advice with the interests of their clients. They gave up the conflicts inherent in collecting commissions. And once again, they were mocked; NAPFA members were branded “holier than thou,” and even though they were actively managing client portfolios, word around the profession was that they “didn’t implement.”

And then, eventually, the independent broker-dealers and wirehouses saw that the pioneers were more effective at winning clients so they created their own “fee-based solutions,” which their reps could sell on the same grid as annuities and nontraded REITs.

And that, more or less, is where we were until about yesterday. Now that the new model has emerged, we’re following a very familiar pattern. Once again, the mainstream is aiming a reflexive distrust and even a certain amount of suppression and derision at the rebels.


What’s the new model? Over the past few years, a number of Gen Y advisors have become dissatisfied with the idea that they should spend the first decade of their careers writing plans in the back office, safely away from all client contact. Their other career option is to start their own firms — where, of necessity, they reach out to clients their own age, who typically have not yet accumulated the $1 million-plus minimum portfolio size that most advisors require.

Newer advisors have had to figure out how to work with these clients profitably. Since there are few assets to manage, the focus cannot, ipso facto, be primarily on managing assets.

And so, for the very first time in the messy evolutionary history of the profession, a growing number of advisors is charging retainer fees purely for advice.

The model is extremely flexible. Most Gen Y-focused firms are helping their clients develop good saving and financial habits, and helping them avoid credit card debt and pay off student loans. They’re helping people start businesses, put money aside for world travel, navigate the beneficiary designation changes and insurance issues that arise with marriage and children, and track their frequent flier and hotel rewards points for the next trip.

Yet the same model could be applied to the client in the shadow of retirement. Indeed, I know one Gen X advisor who is helping clients “practice” retirement by scheduling fun events — including group golf lessons, cooking lessons and wine tastings. He offers clients the opportunity to sample these events 20 times a year — and bring their friends.

If there are assets to manage, these can be delegated to the online firms that so many other planners disparage as “robo advisors,” or outsourced to companies like Adhesion Wealth Advisor Solutions or Frontier Asset Management. Clients are also free to continue with whichever provider they currently use. The advisor gets a monthly fee, paid automatically — just like monthly bills for cellphone service and satellite TV.

Many of these advisors use Google Chat or Skype for their client meetings. That means they can work with clients anywhere in the country or, if they have the proper registrations, anywhere in the world. As a result, they can specialize far more deeply in narrower niches than an advisor whose clients all live within a 15-mile radius of the office.

A potential client might Google the words “advisor specializes in hair stylists opening up new locations” and find somebody on the other side of the country who happens to work with exactly this type of client. And that person will be far more attractive than a generic advisor whose office happens to be six blocks away.

This new model does what all new models do: It threatens a very lucrative established business model that has proved successful over the years. I have heard advisors who work under the AUM model deriding these younger planners, of course. Having seen two of the prior evolutions, the sentiment is very familiar.


I think mainstream advisors should be more open to the implications of this model — for several reasons.

First, this new way of working with clients, still in its infancy, represents more of a threat to the traditional AUM-based firm than anything online advisors will be able to muster — and indeed, may work symbiotically with the online competition. If you were a client, wouldn’t you prefer personalized, ongoing advice that addresses your evolving life, rather than pay a lot more for quarterly performance statements?

Second, advisors are catching the market at a younger age and will have relationships long before would-be clients meet the minimums of the traditional advisory firm. As this new model spreads, it will cut off the client pipeline.

Third, the model is efficient enough to serve a much broader segment of society, and it provides advice when people need it most: when they are first forming their financial habits. No longer will financial planning be available only to a small slice of the wealthiest Americans.

It also appears to allow these planning firms to work with hundreds of clients per advisor.
Finally and perhaps most important: If you want to have a succession plan and keep younger advisors at your firm, you will need to accommodate their preferred model and allow them to bring in clients of their own age. If not, will they want to inherit your firm — and a client base of wealthy decumulators — 10 years from now?

If you aren’t willing to put aside your reflexive distaste for drastic change and a new way of doing things, you might find your successors leaving to create the firm of their dreams — which, to be perfectly clear, is not yours.

Please notice what I am not saying here. I am not arguing that everybody reading this column should immediately abandon the AUM business model and jump aboard a new way of doing business that is still being tested.

What I am saying is that you should recognize the profession is already evolving in this direction. If you want to leave your successors the kind of firm that they will want to manage, and if you want your practice to remain relevant 10 or 15 years down the road, then you should allow your younger planners to join the revolution, and experiment with delivering advice profitably to a whole new market of potential clients.

You may be the first established cohort in our history to keep an open mind about the rebels in your midst, and allow yourself to be drawn toward a pure advice-for-fee model that I think is the visible future of the profession. 

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.

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