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Momentum building for subscription pricing

Grassroots industry momentum is building for subscription pricing.

Charles Schwab introduced a subscription pricing model in April which has gained traction with clients, bringing in $1 billion in new client assets in the last three months.

Bank of America appears to be next up.

“Clients are simply getting used to paying to subscriptions,” Teron Douglas, head of digital capabilities at Merrill Edge, said at SourceMedia’s In|Vest conference in New York. “It’s a logical next step. It’s just a question of getting the pricing right.”

Executives of two smaller firms also offered endorsements for the subscription pricing model at In|Vest.

Alan Moore 0719

“Charging on a percentage of assets under management works well for clients who have assets, but that’s about 1% to 2% of Americans,” said Alan Moore, co-founder of XY Planning Network. “Subscription pricing is a great way to add younger clients who are beginning to build wealth and are used to that payment model.”

Anders Jones, CEO of Facet Wealth, agreed.

“Charging on AUM makes no sense,” says Anders Jones, CEO of Facet Wealth.

“Charging on AUM makes no sense,” Jones argued. “If a client gets a $100,000 raise, why should the advisor get an extra 1% of that? Subscription pricing is more transparent and shows the client the value they are paying for.”

Subscription pricing also has the potential to help boost an RIA’s valuation, according to Moore.

He noted that while advisory firms are valued on EBITDA and growth rate, many RIAs have clients who in distribution mode. “That means the value of their firms is diminishing,” Moore said. “If subscription pricing brings in younger clients, assets will grow faster and increase the value of the firm.”

"Subscription pricing is based more on income and will attract more non-white clients," says XY Planning Network's Alan Moore.

In addition, the subscription model can bring much-needed diversification to an RIA’s client base and advisor mix, Moore contended.

“Charging on assets is charging on accumulated wealth and too many minorities haven’t had that opportunity,” he said. “But subscription pricing is based more on income and will attract more non-white clients, which will, in turn, attract more minorities to the profession.”

Both Moore and Jones concede, however, that AUM remains the dominant pricing model for advisors and is unlikely to be usurped anytime soon.

Some regulators don't understand the subscription model yet, Moore says.

Underscoring that conclusion was the show of hands when Moore asked advisors in the room how many were currently using subscription pricing — and only a few responded affirmatively.

“There’s more pressure on advisors to justify their fees when they use a subscription model, and value is more top of mind for the client,” Moore said. “And billing efficiency and technology for subscription pricing haven’t yet caught up to advisors’ needs.”

What’s more, regulators in several states, including Nevada, Washington and Illinois, have been asking advisory firms questions about subscription pricing. “They don’t understand the model yet and are looking for more documentation,” Moore explained.

Charging an asset-based fee is unsustainable because “what you pay is not connected to the value you receive,” Jones asserted.

But, he cautioned, a shift to subscription pricing “will take decades, not years.”

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