Providing financial planning services takes time. A lot of time. By some industry benchmarking studies, the typical financial planner spends 15-20 hours, and sometimes more, just to gather data, analyze and produce a financial plan, and then deliver it to the client. Which means, not surprisingly, that it’s often necessary to charge clients a substantial financial planning fee to recover the time investment. Especially as financial advisors are increasingly shift to AUM fees and other fee-for-service models, rather than earning a (potentially sizable) commission for the products implemented after the plan is delivered.
Yet the reality is that with the rise of the AUM model in particular, and its recurring revenue potential, it’s actually not necessary to charge upfront for financial planning to get paid for it. Instead, as long as delivering financial planning still provides value, deepens the advisor-client relationship, and improves long-term retention, it’s entirely possible to be “paid well” for financial planning without charging for it separately at all. Because even a relatively small change in client retention rates can produce a sizable ROI for putting in the time and effort to do the financial planning in the first place.
In fact, charging separately for financial planning actually introduces the risk that clients will have “sticker shock” about the cost, and choose not to purchase it at all, which means ironically that charging for financial planning can actually reduce the number of clients who engage in it. By contrast, bundling financial planning into an AUM fee changes the client psychology, subtly encouraging clients to take advantage of the service by making it already included… knowing that clients who do engage in financial planning will be more likely to stick around for the long run anyway.
On the other hand, there is a simple appeal to the “purity” of having clients pay for financial planning at the time they receive financial planning. Nonetheless, the reality across a wide range of industries is that it’s quite common to bundle services together, in a manner that makes some clients more profitable and others less so in any particular year, as long as it averages out over time. And at least with a recurring revenue model, it’s the client’s less-time-intensive years that help to cross-subsidize the more-time-intensive ones – as opposed to a commission-based model, which the profitable clients cross-subsidize other clients instead.
Of course, it’s still impossible to offer “free” financial planning, that is paid by AUM fees over time, for clients who don’t have assets to manage in the first place; for those clients, a fee-for-service model is the only option. Yet for those who do have other means to pay, and other business models to reach them, it’s important to recognize how an advisory firm really can “give away” financial planning and still be paid well for their efforts over time!
source https://www.kitces.com/blog/free-financial-planning-services-roi-with-aum-fee-retention/?utm_source=rss&utm_medium=rss&utm_campaign=free-financial-planning-services-roi-with-aum-fee-retention
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