Three Financial Planning Business Models To Effectively Serve Gen X And Gen Y Clients

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Monthly Retainer Financial Planning For The Price Of A Gym Membership And Cable TV

Financial planning retainer models have already been gaining some popularity in recent years, although most commonly as an alternative to AUM pricing for firms that are struggling to manage profitability in the face of volatile markets and volatile revenues. The core value of this business model is to apply the same principle of the retainer model, but simply do it at price points accessible to Gen X and Gen Y.

This business model has the simple goal of providing a retainer-style financial planning relationship for an ongoing cost of $100/month, which is roughly the average cost that most people pay for a gym membership and cable TV (about $50/month each, depending on your geographic locale). In point of fact, "financial planning for the price of a gym membership and cable TV" can actually be the tagline for the business, as providing a comparison anchor point for the cost of your financial planning services is an effective marketing technique. At a revenue price point of $1,200/year, a target capacity of 150 clients generates $180,000/year of revenue, a pretty healthy income for a business with very few costs. It may not be a business you can sell for very much, but frankly that's really a challenge most financial planning businesses have faced for years; nonetheless, it's a healthy living that can grow over time with additional clients and/or by increasing your pricing as your clients increase their income and wealth too.

Notably, this business model can also be done on a standalone hourly basis, but hourly models make prices highly salient and can cause clients to keep questioning whether each problem/question they have is really worth being "on the clock" for an answer; by contrast, a retainer model encourages clients to keep asking questions and utilizing your services (since it's part of the retainer anyway), helping to ensure that once clients are set up for an automatic recurring retainer charge (either via bank draft or credit card), they remain happy and well-served clients for the long run.

As with a typical retainer arrangement - just with a monthly retainer structure that fits better into the month-to-month cash flow of a younger clientele - services would be provided on an as-needed basis with clients, anticipating some busy points at the end of the year (reviewing employee benefits decisions for the upcoming year) and perhaps during tax season. But more broadly, advice will cover all of the cash flow, tax, insurance, and [simple] estate planning matters that are common to those in their 20s, 30s, and 40s (Gen X and Gen Y). To keep the business efficient, and to manage utilization, most questions/issues/meetings could be handled via email, phone call, and video conference, which also opens up the potential for working with clients outside your local geographic area; not only is there little need for in-person meetings in most situations, but the reality is that aside from an introductory meeting (for clients who are local), most tech-savvy Gen X or Y clients will likely appreciate the flexibility of a tech-savvy advisor that uses the available tools and technology of today!

This also means that beyond some financial planning and CRM software, a website, an email account, a phone number, and video conferencing capabilities, your business will have virtually no overhead costs! You may not even need an office! In addition, the business model is rather simple from a compliance perspective, as it can be done with just a state RIA registration. There will be no actual assets under management, and no product implementation, so there is no need for the cost or hassle of a custodian or broker-dealer, and much of the essential state RIA compliance can be outsourced or templated (e.g., RIAinaBox, RIA Compliance Consultants, or RIA Compliance Group) given the simplicity of services involved. (Technically, if no investment advice is given, setting up an RIA might not even be necessary, although many clients may wish for guidance on their portfolios and 401(k) allocations, so getting the RIA set up is a good idea.)

As with other monthly-cost business models outside the financial services industry (including the aforementioned gym membership and cable TV), the reality is that particular clients will need your services more in some months, and less in others, and may even go long stretches without any questions at all; as long as the total needs of clients match up with the capacity to answer their questions, and the revenue is reasonable, though, the business model works just fine. Especially since your prospective clients have probably never seen anyone else offer services like this, as there are still relatively few Gen X and Gen Y planners offering such services, which means you will likely have virtually no competition!

Comprehensive Financial Planning Services Via An RIA And Insurance License For Today's Young Professionals

In this second business model, the goal is not just to provide (and be paid for) advice, but also to provide (and be paid for) the implementation of the client's financial planning needs, including both the investment and insurance product needs common to today's emerging Gen X and Gen Y affluent. The core value of the business would remain financial planning, with recommendations crafted through an appropriate fiduciary process; nonetheless, proper financial planning recommendations do lead to a need to implement the recommendations, which is how the planner under this model gets paid.

This business model relies on a state RIA registration, and a state insurance license, to implement the investment portfolios (on an AUM basis), term insurance, and disability insurance most commonly needed by those in their 20s, 30s, and 40; after all, the clients are going to have to implement after receiving your advice, and the cost of a particular term insurance policy is the exact same whether they buy it from you or via TermInsurance.com (but you earn a couple hundred dollars for implementing)! Average revenue per client might be anywhere from $1,000 to $3,000 per year, depending on the depth of services and the particular implementation needs of the client, leading to a potential gross revenue that averages about $300,000 with a "full" 150 clients (albeit with some income volatility given a smaller AUM base and some fluctuating needs for insurance products from year to year). Notably, because no commissionable securities products are used - i.e., no commissioned mutual funds, variable life insurance, or variable annuities - there would be no need for a broker-dealer relationship. Just an RIA for the investment management fees (along with a relationship with an investment custodian), and a state insurance license (along with a relationship with a life insurance brokerage general agency).

Ideally, this business model should be implemented with a more clearly defined niche; it could be tied to a particular large employer in the area, a certain type of business or industry that's popular (e.g., computer programmers in Silicon Valley, or young doctors at the area hospitals), or simply a common planning scenario (e.g., parents starting a family and having their first child). The key is that by having a niche, you will be able to clearly demonstrate yourself as an expert in the particular type of clients you (wish to) work with; otherwise, you will struggle to bring in clients competing with every other local young insurance agent or mutual fund salesperson. In addition, having a clear niche makes you more referrable to prospective clients.

Notably, this business model could be attached to the preceding one, with a retainer to provide an initial baseline of income. However, the reality is that if there is already opportunity to generate revenue by implementing recommendations for clients, there isn't necessarily a need to charge clients upfront or on an ongoing basis as well; instead, that may lead to ultimately charging them more than is necessary, or cause them to balk at an upfront retainer fee and not engage in the planning work that would have led to more revenue implementing solutions that the clients needed anyway; in other words, it's not just how much you charge, but also making good decisions about how you charge, and the saliency of your pricing model, that ensures the success of the business.

Wealth Management For The Emerging Affluent As A State-Registered Investment Adviser

The greatest irony to the number of RIA firms that have $1,000,000+ investment management minimums is that virtually all of them started with much lower minimums, and were able to serve those clients profitably enough to not only be successful and survive as a business, but thrive and grow to the point where the firm could establish higher minimums! Thus, the core value of this business model is simply to get "back to basics" - providing wealth management in the form of comprehensive financial planning plus investment management services to today's emerging affluent, who might "merely" have $100,000 - $500,000 of assets to manage, rather than a million or few.

This business model would start with a state RIA registration, and requires a relationship with a custodian that will be friendly to a new start-up RIA (such as TD Ameritrade Institution, ScottTrade Advisor Services, or SSG), and setting up a fee schedule that might be 1% to 1.5% of AUM (typical for "lower" levels of net worth). Given the available assets of clients involved, this would lead to revenue of $1,500 to $5,000+ per client, which actually means this business model may ultimately be able to generate the widest profit margins as it grows to gross revenue that may reach $500,000 or more for the same 150 "maximum" number of clients. Notably, this model will (or should) still have some asset minimums, and from that regard it may be more limited in the number of potential clients than the preceding models. On the other hand, the reality is that there's still a wide swath of "mass affluent" individuals, many of whom are Gen X (and perhaps some Gen Y), with at least $100,000 but less than the minimums of large RIAs.

As with the preceding model, having a clear niche will help this model to succeed, although ironically one of the best "niche" opportunities is to simply develop relationships with other RIAs in the area that have higher minimums, to demonstrate that your firm is ready and willing to provide quality financial planning and investment management services to those clients who don't meet the larger firm's minimums. By building relationships with key firms and centers of influence within the local membership associations (e.g., FPA, NAPFA, or SFSP) it's possible to generate a flow of new clients simply via referrals from other advisors, who are often happy to refer out the clients below their minimums to peers who they trust will do a good job!

In addition, this business can also be overlaid with the first model - offering a minimum ongoing retainer for any clients who want to work with the advisor, which is replaced by AUM fees as the client's investment assets grow. However, as I've written in the past, all else being equal an AUM model will tend to be more financially successful than a retainer model, so the point here would be for a retainer to provide a minimum fee per client for what is otherwise still primarily an AUM model. It's also worth noting that creating business models that have too many choices for how the advisor gets paid can also be problematic, as clients become paralyzed by the "Paradox of Choice" and become unable to make a decision at all; in other words, simplicity reins in this regard, and represents an opportunity to help clients through their sometimes irrational decision-making process, so the model shouldn't offer too many different choices at once that may be confusing to both prospective clients and potential referrers.

Growing A Successful Gen X/Y Practice

Ultimately, the reality is that it's not actually that difficult to create a business model that can effectively serve Gen X or Gen Y and still be profitable, especially if the business is built lean from the start with a goal of establishing a steady income for the owner. All of these business models can generate a reasonable amount of net income for a financial planner, with some or all of the income recurring annually for further stability. And while the value proposition for Gen X and Gen Y clients is somewhat different than traditional models, it's not necessarily that difficult to deliver.

Instead, the key - or alternatively, the great challenge - of building a successful practice is really about the ability to market and grow the practice to generate a sufficient number of clients in the first place. In fact, the reality is that "marketing challenges" is already the primary reason that financial planners fail to serve the majority of Americans; simply put, the difficulty is not how to be profitable serving the majority of Americans, but how to reach enough of them to serve in the first place. Accordingly, this article suggests not only some business models, but also some guidance about how to market and position them, which can then be supplemented by networking and referral strategies, social media and blogging based inbound marketing strategies for financial planners, and more. Although without a doubt, the rise of technology and the digital age for financial planners, with the explosion of outsourcing options, makes it easier than ever to build a profitable practice focused on Gen X and Gen Y!