Why the future is all about subscription fees: Q&A with In|Vest speaker Anders Jones
Q: Facet Wealth charges clients on a subscription fee. Is a flat-fee pricing model catching on?
ANDERS JONES: For a long time in retail services, value has not been aligned with the price paid. The key argument is charging someone 1% on investable assets is great, until they get a raise or a bonus and have more assets. Why should the advisor make more money for doing the same amount of work?
In an efficient market, clients will always move toward price and value. In the asset-based model, there has been a lot of obscurity and complexity around financial planning and what exactly an advisor does for a client. With subscription fees, there is much more transparency and suddenly the relationship is a lot easier to understand. The world is definitely moving in that direction.
What robo advisors have done for the world is to make access to asset management very cheap and affordable. That’s a great thing, but it’s not necessarily sufficient. The value proposition of asset management has been so commoditized. This proves how far a plan goes. Financial planning has very little to do with asset management.
What’s the ideal customer for subscription fees?
For the ones that are making money, it might make sense to charge a flat fee or a minimum in order to make the decision. First figure out what customers break even. Typically, firms are going to find a high number of clients that fall below that gross profit line. Then the decision becomes, 'Do I keep those clients and charge them more or do I transition them to somewhere else?'
It's totally counterintuitive to move away from unproductive clients. Advisors have to really wrap their heads around not all revenue is created equal. There is profitable revenue and unprofitable revenue. If you cut out less profitable or unprofitable clients you will end up running a more profitable firm. Taking a dollar of revenue away can be good for the business.
What happens to revenue?
Overall, revenue is likely going to go down, but the benefit is that firms know how much they will make from clients year-over-year. You’re giving up some upside to lock in that stability. Frankly, if you’re a smaller firm and you’ve got a good lifestyle practice, it probably doesn’t make sense to make a change. As more and more firms consolidate and form super regional and national RIAs, it makes more sense. I don’t think we’ll see it en masse at the smaller independents. It requires a whole professional standard of service and building scalable and repeatable processes. So, for a couple hundred clients, is that really worth the investment?
Many firms have added new products like credit cards and cash accounts. What’s your take?
Innovating on products or trying to come out with new accounts and cards is somewhat gimmicky. I’m not sure how most of the firms are going to make money. It’s just a way of continuing to push product as opposed to an approach that provides value. The value of working with a wealth management firm is the personal relationship that clients develop over time. It’s someone who actually knows who you are as a person. Frankly, you can’t get there with a better cash account. You can’t get there with a different credit card. Clients need to spend time with a human. Innovations on products is kind of going in the wrong direction.
What’s holding back tech innovation?
At an advisor distribution level, the challenge is an incredibly fragmented marketplace. There are some 25,000 RIAs alone, not to mention, dually registered advisors and hybrid advisors. And, you are basically selling to small business owners and there is a tremendous amount of hand holding and integration to getting folks up and running on new software. When you do the economics it’s really hard to justify that level of hands-on support to get a $50 million advisors on your platform. There’s just a mismatch.
Did you see large technology firms as potential competition?
The biggest challenge in the financial services sector is distribution. Firms spend a lot of money to acquire a single customer. Customers like Amazon and Apple have access to hundreds of millions of customers. If they wanted to turn on a financial services product, the hardest part is relatively easy for them.
I’m fairly bearish on them entering the market in a meaningful way. If they were going to do it, they would have. Amazon has a lot of ability to do a lot of different things that are much closer to its circle of competence. I don’t see how you get from Amazon Web Services and Whole Foods to wealth management.
There’s also going to be insiders. There will be a few players in the large institutional space, in insurance and banking, who will figure out a way to reinvent themselves and add the financial planning pieces in a meaningful way.