Financial planning is being redefined from an exclusive benefit to a benefit for the masses.
Most important points:
- Asset-based compensation models support the overserved.
- New models aimed at serving many are emerging.
- Employers get involved in personal financial benefits.
The term financial advisor feels… exclusive. And that is not without reason. For generations, the industry was organized in such a way that advisers were rewarded for serving only wealthy individuals. Over the past decade, the financial advisory industry has been reinvented, making this the best time ever to hire a financial professional.
How it was
For most of the industry’s history, asset managers have been incentivized to serve the wealthy, using something called an Assets Under Management (or AUM) model. Here’s how it works: An advisor takes on two clients, client A to manage $1 million and client B to manage $5 million. The advisor provides investment advice at a fee of 1.2% on the first $1 million of investable assets and 1% on assets above that amount. Customer A pays $12,000 per year, while Client B is charged $52,000 per year. Client B is, because he has more assets, a much more attractive client for the advisor.
The focus of financial advisors within the AUM model is on investable assets, not holistic financial planning. So while advisors may have conversations with clients about their personal finances, these conversations are often seen in the light of raising investable assets for the advisor to pay on. Under an AUM model, those seeking financial planning services without the resources to support them may be left out in the cold.
A dramatic shift to average investors
In the past five years, however, the industry’s attitude has shifted towards serving the average individual. Rather than charging clients based on assets, some advisors charge flat fees to offer a range of services. These services typically include a comprehensive financial plan, including investment advice provided by their AUM-charging counterparts.
How each advisor approaches their fee structure differs, but often these lump sum structures are more hands-off. For example, a fixed fee advisor can serve client A with $1 million in assets and client C with no investable assets. The advisor may charge $2,000 for a one-time, comprehensive financial plan, regardless of a client’s assets. In this way, Client A and Client C receive the same service for the same price, and the advisor is not encouraged to serve only the wealthy individual – the fee will be no different for them!
The effect of the flat fee model on the democratization of the financial planning industry is difficult to overestimate. Now, those who didn’t qualify for the minimums required to walk into an AUM advisor’s office have access to the same caliber of financial expertise.
Financial Wellness Programs
One of the bigger shifts in the industry is the availability of financial wellness programs for ordinary workers. In the past, financial advisors were only offered as a benefit to executives. Now employers in various sectors are opening their doors to financial advice for all their employees.
Workplace financial wellness programs can take a variety of forms, including bringing in workplace financial planners, offering financial seminars, and rolling out a range of technology resources. In addition, employers can provide access to a 1-800 line for financial advice, as well as free or discounted services with a third-party financial planner.
If your employer offers financial planning services, take advantage of them. Employers like to see employees use their resources, and the services can go a long way in securing your financial future. Finally, recognize that financial wellness programs are part of the increasing democratization of financial services as they shift from serving the few to serving the many.
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