UK financial planners should be giving serious consideration to a £150 per month fee model to serve millennial clients with planning needs, decent incomes, but low or no investable assets.
That is the message of US financial advice guru Michael Kitces, in an interview with New Model Adviser®.
The US planner, author and speaker, is a partner at Pinnacle Advisory Group in the US, a financial planning firm with over $2 billion (£1.5 billion) assets under advice. Kitces is also the founder of the XY Network, a business with 877 affiliated planners who specialise in advising Gen X (roughly those in their late 30s to early 50s) and Gen Y (or millennial) clients.
In the UK, unless a client can afford to pay an upfront fee for regulated financial advice, typically in excess of £1,000 or £2,000, or has sufficient investable assets from which an upfront and ongoing percentage fee could be taken, advice can seem inaccessible.
Read more: how 10 IFAs charge clients for advice
Kitces said in both the UK and US, while mortgages and rent or services like Netflix and mobile phone contracts are paid monthly, financial planning still charges up front.
‘We don’t charge fees in a way that fits how most working people pay for things, which is not giant lump sums all at once,' said Kitces. 'Instead [the initial fee] is amortized over 12-month periods to make the cashflow manageable and it suddenly makes it much more accessible, particularly for young people.’
Kitces said a ‘fairly typical’ fee XY planners were using was between $100 and $200. However, he said some clients will pay several hundreds of dollars where an adviser has ‘very specialised niches’ or ‘very deep expertise with a very select clientele’.
A $150 per month charges would equate to $1,800 a year. An adviser serving 100 clients would make $180,000 a year of revenue. And, Kitces said: ‘If you’re running an advisory business like that, you can run it extremely lean in costs’.
‘You don’t have a lot of technology costs, you don’t need to pay for expensive platforms because you’re not selling any products, you may not even be investing any assets. You just need the basic planning software, CRM systems to run your business. So we see a lot of advisers that can run businesses like that and take home 80% of their revenue or more.
‘So, they’re netting $150,000 a year of take-home income, which is by adviser standards, is a good number.’
As assets grow, he added, the fee can be ‘blended’ to incorporate charges for investment management and so on.
‘But who does financial planning appeal to? Probably anybody under the age of 50. There are probably millions and millions and millions of people who would be happy to pay for financial planning advice and literally no one will charge them for it.
‘Their only option is: give me your life savings for advice. And if you don’t have any life savings you can’t have any advice, unless maybe you buy a product, which now you can’t do either.’
Crucially, the US planner claimed, the retainer model makes advice firms think harder about how they can justify the costs month on month, not just at an annual review. The first issue to deal with is: what problems could a millennial or Gen X client want help with?
‘We sometimes forget just the actual complexity of real human beings, as they go through their lives. What advice would you give people through their 20s, 30s and 40s? How about: navigating first job, learning good budgeting and savings habits, asking for their first raise, negotiating their employee benefits.
‘Switching to a second job, deciding to go back to school, taking time off from work, negotiating the third job, deciding to get married, saving for a first house, saving for a first child. Saving for a second child, getting divorced, starting a new marriage, having a third child in the next blended marriage, buying another new house, deciding to go off to start your own business.’
Meanwhile retired clients, said Kitces, generate only three, albeit complex, changes: retirement itself, health changes and death.
Kitces argued the retainer model was also most sound from a regulatory point of view. As long as people were not tied into multi-year contracts, he said, ‘you just stop paying as soon as you don’t feel like you’re getting value any more.’
This puts a lot of ‘positive pressure’ on the adviser. ‘What are you doing to keep adding value? Are you staying in touch with your clients? Are you staying in front of them? Are you giving them ongoing advice?
‘Are you finding ways to systematise and scale the advice you deliver so you don’t drown in your practice trying to do all this work for all these clients? That’s part of what makes it work for all involved.’
Kitces stressed he was not dismissing assets-based charging or percentage fees, or that working with older clients was not extremely worthwhile. But he said that, in the US at least, it was a finite market.
‘There’s nothing wrong with the model, it’s great. The problem is just that, a) it generally only works for old people because they all own something and piles of money, liquid and available. And b) it only works for a couple of percent of the entire population who are just affluent enough and have large enough sums of money to make the model work.’
The full interview with Michael Kitces will be published later this month.