Ten Ways the Next Generation of Financial Planners Will Change the Profession

May 6, 2014

by Bob Veres

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Recently, I was invited to serve as a thought leader and facilitator at the 2014 NexGen conference, which will be held June 20-22 at Augustana College in Rock Island, IL.  The NexGen conference has emerged as the premier educational event for the Gen X/Y advisory cohort (defined as under age 36, although the event is open to all ages).  A number of planning firms have started sending their younger successor advisors to the conference in order to accelerate their development as leaders, managers and marketers, and generally acquire the skills that will be necessary when they take over running the firm.  The older advisors may also be quietly having their planning staff gather insights into new emerging paradigms that are evolving within the next generation, so they can better market their services to the emerging generation of clients.

Having interviewed a number of people who will attend the NexGen gathering, and others who are in their generational cohort, I have distilled the ten key themes that illustrate how the next generation of advisors will change the profession when they take the reins.

1. Next generation advisors will commoditize ongoing asset management services.

Think of managing assets in two components: portfolio design and robo-advisor routine activities like rebalancing and harvesting tax losses.  Designing the initial portfolio customizes it to the client and the client’s goals, and can be thought of as part of the initial planning engagement.  The ongoing processes can be automated or outsourced altogether.

Jude Boudreaux, of Upperline Financial Planning in New Orleans, LA is one of a growing number of NexGen advisors who have dropped their clearing firm relationship the way the previous generation dropped their Series 7 license.  “I don’t have the cost and expense of having a server or a clearing firm, because I’m not doing any trading,” he says.  “I hired Symmetry Partners to handle the implementation and investment management for my clients who happen to have investment management needs, and it all works.  Other clients,” he adds, “have money at Vanguard.  We help them create initial allocations, and they send us duplicate statements, and we can monitor those as well.”

NexGen advisors who are more traditional point out that Adhesion and Orion are already providing the services of the robo-advisory firms, and one of the top robo-advisors, Betterment, is quietly preparing to launch an institutional platform for advisors who want to outsource everything but the portfolio design.  For Gen X/Y planners, the robo-advisory movement will be a synergistic friend rather than an enemy.

At the other end of the spectrum, more than a few NexGen advisors think the whole asset management revenue model is something of a charade.  “The ability to sell alpha is gone, if it was ever there in the first place,” says Alan Moore of Serenity Financial Consulting in Bozeman, MT.  “Our younger clients don’t need investment advice,” he adds.  “They understand that you cannot out-gain bad savings habits.  When I look at our clients’ net worth statements from one year to the next, it is amazing how small of a portion of their increase is attributable to investment returns.  The bulk of it comes from savings, and cutting spending, and really finding that balance.”

2. Next generation advisors will charge differently for their services.

Younger advisors point to two weaknesses in the AUM revenue model that predominates in the profession today: it excludes too many potential clients and it puts the focus on the wrong side of the relationship.  “We’re seeing a transition to financial planning truly being the focus,” says Moore.  “Even fee-only advising, the way it is practiced today, has been investment-centric.  We haven’t been focusing on the value of the planning work.  What younger clients need is a planning-centric approach.”

So how will NexGen advisors get paid?  “A lot of the clients we work with don’t want to pay a high up-front planning fee, and they don’t have assets to manage,” says Moore.  “So we hit the debit card for $100 or $200 a month, just like the gym membership and the insurance bill.  People pay their other bills monthly, so why not pay a financial planner the same way?”

Boudreaux cites the example of a young professional couple in their early 40s who signed on as clients recently.  “They’re making good money, but because they have various debt issues and things that are out of whack in their financial lives, they would never get in the door of a traditional wealth management firm, which charges based on assets,” he says.  “We set their annual fee at $3,000, and they pay $160 a month that comes out automatically.”

Another client, a young surgeon with limited savings who makes $400,000 a year, pays Boudreaux a $4,000 annual fee by check.  “This is somebody who would have never been a profitable client for a lot of planning firms, but it’s a profitable relationship for me,” he says.  “Charging for planning,” Boudreaux adds, “puts the client in the center of the relationship.  I say: people are my client, not their money.”

One of the more interesting fee experiments can be found at Timothy Financial in Wheaton, IL, where company founder Mark Berg offers packages of planning hours, similar to the way different service levels are bundled into the cell phone or cable bills.  If the client wants 10-14 hours of planning work a year, the cost ranges from $1,400 to $3,360, depending on whether the work will be done by one of the staff planners or Berg himself.  A package of 40+ hours costs $12,800 a year.

For Berg, these ongoing fee arrangements eliminate a number of conflicts of interest that still exist in the profession at large.  First, clients are free to have their assets managed anywhere, which removes a big part of the sales agenda in traditional prospect meetings, where the hidden goal is to get the assets transferred.  Second, the hourly package arrangement – like the monthly fee arrangements that Moore and Boudreaux offer – provide incentives for the advisor to continue offering planning advice and service, rather than simply send out performance statements four times a year and schedule a meeting to look over them.  “The initial planning work can be a loss leader the first few years for the firm,” Berg points out, “but then as the line is crossed toward profitability, that’s when the client questions the ongoing fee.”

And third, there is a conflict whenever clients with larger portfolios are subsidizing those with smaller ones, as is the case at many planning firms.  Before he switched revenue models, Berg found himself putting more time and energy into clients whose portfolios paid him $2,500 a year with whom he enjoyed working or whose lives were more complex, than clients whose portfolios were paying him $40,000 a year.  But is that fair?

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