Bundling Financial Planning To Recurring Advice Fees For Long-Term Profitability

Bundling Financial Planning To Recurring Advice Fees For Long-Term Profitability

Providing financial planning services takes time. A lot of time. In fact, according to a recent Kitces Research study, the average advisory firm spends 10 hours just constructing a financial plan, and more than 30 hours across the firm servicing a client throughout the first year to gather data, analyze and produce a financial plan, deliver it to the client, implement the recommendations, and begin the ongoing monitoring process. Which means, not surprisingly, that it’s often necessary to charge clients a non-trivial financial planning fee upfront to recover the time investment. Especially as financial advisors are increasingly shifting to AUM fees and other recurring revenue fee-for-service models, rather than earning a (potentially sizable) upfront commission for the products implemented after the plan is delivered.

Yet the reality is that with the rise of AUM and subscription models in particular, along with their recurring revenue potential, it’s actually not necessary to charge upfront for time-consuming financial planning to get paid for it. Instead, as long as delivering financial planning still provides value, deepens the advisor-client relationship, and, most importantly (from the business perspective), 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 improvement in client retention rates can produce a very sizable Return On Investment (ROI) for putting in the time and effort to do the financial planning in the first place.

In fact, charging separately for financial planning (and maintaining lower ongoing fees once the upfront planning work is completed) actually introduces the risk that clients will have ‘sticker shock’ about the upfront cost and will 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 or subscription 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, and keeping costs and fees more directly aligned in each and every year. 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 (and with retention rates for ongoing financial planning firms approaching 98%, most clients appear to be quite comfortable with that reality!).

Of course, it’s still impossible to offer ‘free’ financial planning, paid for with AUM or subscription fees over time, for clients who don’t have assets to manage in the first place; for those clients, a fee-for-service model where clients pay directly for financial planning 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… at least for firms that have the confidence in their client retention and the patience to grow profitability over time!?

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