The conventional view in financial planning is that if something is free, it’s usually worthless. If we want consumers to really value planning, we need to charge for it. Yet the caveat, as expressed by author Chris Anderson in his book Free: The Future of a Radical Price, is that bundling free solutions with a paid product or service is an entirely legitimate business model, and a surprisingly robust one.
In fact, the classic “freemium” model of giving away an initial product or service while being paid for a complementary or supporting solution may actually help grow your business and allow you to gain even greater adoption in the process. This suggests not only that offering free financial planning over the past several decades has been a good business model, but also that it may have even helped to gain adoption and acceptance of planning in the first place.
On the other hand, the reality is that advancements in technology are beginning to undermine the products and asset management services that have classically been the financial engine of the planning business model.
From declining commission rates on products to the decline of commission-based products, coupled with new threats to the pricing of asset management from robo advisors, the trend suggests that the free-planning-plus-paid-financial-products-and-services model may be on its way out.
The landscape is already shifting: Schwab, Fidelity and Vanguard have begun to deliver their solutions (packaged together with free financial planning) directly to consumers.
FREE AS A PRICING MODEL
Anderson makes the case that incorporating free elements into a business model is far more robust than we commonly assume. Whether it’s Gillette giving away razors more than a century ago to sell a lifetime of blades or modern-day cell hone carriers giving away phones in order to sell ongoing voice or data plans, Anderson makes the case that the free components of a business model aren’t going away soon, and in fact are something to build around.
The essence of free as a business model is the cross-subsidy — the idea that even if one product or service is free, it supports the growth and sale of another.
For many advisors, the fact that planning has been given away to support the sale of other financial products and services has undermined its value. As the prevailing view goes: How will consumers ever truly value financial planning as long as we treat it like the free toaster you get when opening a bank account? The basic concept: If we want consumers to really perceive value in financial planning, it needs to be priced and paid for directly.
Anderson says that the model of giving something away (as part of a broader business model) doesn’t necessarily make it worthless. After all, if it didn’t have any perceived value to consumers, it wouldn’t work as a free product to support a cross-subsidy in the first place. A free newspaper with valuable content is sought out, supporting its advertisers, while a free newspaper with worthless content isn’t read by anyone, and loses its advertisers.
In fact, one virtue of the free model is that it can actually fuel growth of the perceived value of the service. For instance, the market capitalization of Google has approached $500 billion, built predominantly around its advertising businesses that succeed because of the tremendous adoption of Google’s free apps, from its search engine service to offerings such as Gmail and Google Maps.
A key point here is that Google never would have had such adoption in the first place if it had charged for those services directly. Google’s success isn’t just a story of advertisers who cross-subsidize free solutions, but of an explosive growth in the adoption of those solutions and the creation of loyal users because they were free.
Similarly, one might make the case that, if financial planning had been a separate service that was separately paid for over the past decades, it would have been used by far fewer people, which would have limited its word-of-mouth growth, favorable public perceptions in the media and more.
While one might make the case that financial planning has succeeded in part because its freemium model allowed it to reach a wider initial audience, a significant challenge in today’s environment is that the free aspect of financial planning was possible only because of the strength of the product and service solutions that cross-subsidized it. If selling financial products or services becomes less lucrative, the freemium model may be undermined.
And, in fact, that may already be happening. As technology continues to commoditize elements of the financial services industry, there is likely to be downward pressure on AUM fee structures.
As the profitability of these product and wealth management service models are being undermined, the freemium financial planning model will be as well.
The increasing pace of industry conversations about unbundling financial planning fees and alternative retainer-fee-based business models may be less about a hunger for consumers to pay for financial planning and more an imperative as the free-financial-planning-paid-by-products-and-AUM-fees approach continues to disintegrate, and the profitability of products and AUM fees faces a potential decline.
Notably, Anderson points out that the nature of models based around free is that they do change over time dynamically. As the world changes and breakthroughs takes products and commodities that were previously scarce and make them prolific, entirely new business models arise.
GUNS V. BUTTER?
A key tenet of Anderson’s book is that, in the digital world, the price of anything built around bits will inevitably move toward zero. As computing power, storage capabilities and Internet bandwidth continue to double every 12 to 18 months, any solution that is purely technology-driven will see its price decline continually.
As Google Maps replace Garmin navigation devices and discount brokerages replace stockbrokers, it is possible that robo advisors will replace many of today’s portfolio management solutions (not necessarily the people who prepare and deliver financial advice, but the actual implementation of the portfolios themselves).
The implication of these trends is that, while human advisors do provide value in a financial planning relationship, the business model to deliver it may soon have to be rebuilt. The rapid evolution from scarcity to proliferation invariably creates new scarcities, as well. For example, Waze personalized traffic reports for those getting otherwise-free navigation services, and was ultimately sold to Google for $1 billion.
The irony of innovation, however, is that it’s not always apparent what exactly is becoming abundant and what will become scarce and desirable (and therefore able to command a value premium).
Notwithstanding the technological pressures on much of the investment management industry, the reality is that distributing financial services products remains highly profitable, especially for the companies that manufacture and distribute the products.
This means that there may still be enough money in financial products to continue to maintain a “planning for free and paid for the products” model instead. After all, the steady decline of the commission-based model in financial planning didn’t lead to an explosion of paid-for financial planning alternatives. Instead, it led to the rise of the AUM model.
CUTTING OUT THE MIDDLEMAN
Accordingly, in the near term it seems that the next evolution of the free-based financial planning model may simply be a shift to financial product manufacturers “in-sourcing” their financial planning solutions and offering free to consumers directly, implemented with their own proprietary products.
In other words, the coming innovation in financial planning business models may amount to just cutting out the independent advisor as a middleman, while firms that sell financial products offer their own free-financial-planning-plus-product solutions directly to consumers.
On the other hand, if the price of investment management services and financial products is ultimately moving toward zero, then perhaps the financial planning business model of the future is not to give away the planning and get paid for the financial products and investment management, but to give away the products and investment management and get paid for the planning.
What would it mean if we managed AUM for free and got paid for planning, instead of the other way around?
After all, one of the most common scarcities across most business models is that, while information or a product may be abundant, the ability to apply a customized solution for your individual circumstances remains a scarcity.
In fact, this is a cornerstone of many freemium models today: The standardized out-of-the-box solution is free (or at least very low cost), but getting a customized version adapted for your personal needs has a cost.
In fact, one of the key value propositions for financial planning has always been about its focus on adapting generic planning (and investment and insurance) strategies for the client’s personal circumstances, needs and goals.
Of course, the caveat is that, to be a truly scarce and valuable service, it might not be enough to simply try to start charging for financial planning while giving away the investment management. When consumers are already accustomed to paying for investment management (albeit for less and less) and getting planning free, suddenly charging for a previously free service can meet significant market resistance. This is probably why fee-for-service financial planning has been slow to be adopted industrywide over the past decade — there are still too many competitors offering a similar service free.
FREE VERSUS UNIQUE
In the end, it’s necessary to figure out what kind of financial planning service would be unique and differentiated enough from what’s already available for free. It has to be something that can be done more easily, thanks to the abundance of technology, and can still add up to a viable business model in the aggregate.
Being paid for planning and giving away investment management might be one possibility, especially if it’s narrowed down to a particular niche clientele who receive financial planning services that is truly unlike others available for free.
In the coming years, we’ll see which of these paths ultimately unfolds. But if there’s one takeaway from Anderson’s book, it’s the recognition that business models based on free are not likely to go away anytime soon, even if the nature of what’s free and what’s paid for will evolve over time.
In fact, carefully considering what will be free and what will be paid impacts everything from the business model itself to its ability to grow and gain adoption by consumers, and beat other competitors.
Michael Kitces, CFP, is a Financial Planning contributing writer, and a partner and director of research at Pinnacle Advisory Group in Columbia, Md. He’s also publisher of the planning industry blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.
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