Executive Summary
In recent years, the rise of the robo-advisor has driven a realization amongst most financial advisors that it’s absolutely essential to provide value beyond “just” portfolio management itself to attract and retain clients. This surge of interest in delivering financial planning is driving the growth of CFP certification to record levels (now more than 80,000!), but is also causing many financial advisors to question the entire AUM business model altogether; after all, if the future is all about getting paid for financial planning and not investment management, then will consumers eventually compel advisors to move away from the AUM model and towards fee-for-service financial planning?
Yet the caveat of this transition is that there’s an incredible operational efficiency to charging AUM fees. They’re straightforward to calculate, the infrastructure already exists to sweep fees from investment accounts and remit them to advisors, and the AUM fee is psychologically easier for clients because it happens automatically on their behalf. By contrast, charging directly for financial planning requires managing invoices, collecting and cashing physical checks, and a process to collect for late/missed payments. And from the client’s perspective, writing lots of checks for fees often just makes clients more fee-sensitive.
To address this challenge, we’re excited to announce the launch of AdvicePay, a new payment processing platform for financial advisors specifically created to facilitate fee-for-service financial planning fees (both one-time and especially recurring retainers). Because the reality is that while there are already a lot of other payment processing platforms out there, from PayPal to PaySimple, to the Quickbooks Merchant account, most don’t even meet the compliance requirements of state regulators to avoid custody and provide proper notifications to clients, some prohibit financial advisors from using them at all, and none are built to integrate with the existing systems of financial planners (nor do they appear to have any intention to ever do so!)!
Yet after registering a few hundred independent RIAs with state regulators in just the past 2 years alone at XY Planning Network, we’ve learned exactly what regulators really expect and are looking for to ensure consumers are appropriately protected, especially when it comes to charging ongoing recurring retainer fees. And while we originally built AdvicePay simply to solve this problem just for XY Planning Network, we’ve realized that with the entire advisory industry shifting towards financial planning – leading to a growing demand for a payment processing system to handle all those fee-for-service payments – there is an opportunity to help even more financial planners, and more consumers who want to work with them. Especially given how many people might need financial planning, and would be willing to pay for it, but don’t even have liquid investment assets to manage – and need a way to pay for financial planning directly from a bank account or credit card.
As a result, we’ve spent the past several months expanding the capabilities of AdvicePay to handle the wider needs of the financial advisor community, raised $500,000 of venture capital funds to support further development, and are excited today to be rolling out AdvicePay to the entire financial services industry… so anyone who wants to build a fee-for-service financial planning business will now have the tools to do so (in a compliant manner!).
In the long run, we’re not certain if financial planning fees will simply become a supplement to the AUM model, replace it entirely (where advisors charge for financial planning, and give away asset management for free!), or branch out further into its own path as a means of serving new consumer segments who can’t be served by AUM fees alone. But we’re excited to see what AdvicePay can do to help support the ongoing growth of the financial planning profession!
The Billing Problem With For Fee-For-Service Financial Planning
In recent years, various forms of hourly and retainer fee-for-service financial planning business models have been on the rise. In some cases – such as the Garrett Planning Network supporting planning for the middle class, or XY Planning Network supporting planning for Gen X and Gen Y – it’s about accessing new advice markets that don’t necessarily have assets to manage in the first place. In other cases, it’s simply about stepping away from the increasingly crowded AUM model – from robo-advisors to the growth of fee-based advisors with DoL fiduciary – towards an arguably-less-conflicted fee-for-service model, or at least one that can differentiate on its pricing structure. Some have already suggested that “the AUM fee is toast” and it’s only a matter of time before all financial advisors are paid on a fee-for-service basis.
The challenge, however, is that the process of billing fixed or retainer fees is substantially less efficient than the AUM fee model. Checks have to be physically collected and physically deposited, with a careful (and manual) reconciliation process to match paid checks to invoices. For advisors who charge ongoing (retainer or subscription) fees, and not just one-time hourly or project fees, the invoicing process is even more complex, requiring both a (manual) tracking process for outstanding and paid invoices, and a follow-up (manual) process to try to get clients who miss payments to mail in checks when they’re overdue.
Some financial advisors try to resolve this issue by billing the client’s investment accounts for the financial planning fee. But in some cases, the holistic planning fee could dwarf the size of the account, such as when a multi-millionaire entrepreneur tries to pay a $10,000 retainer fee (which they can certainly afford by net worth) from an investment account with “only” $100,000 (where the holistic fee is a whopping 10% AUM fee when billed solely against the investment account!). And of course, it’s not even permissible to bill a financial planning fee to a retirement account. Not to mention that many clients who could be served with planner or retainer fees don’t have investment accounts (at all, or not available); in fact, that’s the whole point of using fee-for-service financial planning to reach new markets! But it means using a (non-retirement) investment account to pay (ongoing) financial planning fees is unreliable at best.
From the client’s perspective, paying fixed and retainer financial planning fees by check can also be “painful”. It’s a hassle to have to keep writing regular checks and mailing them in. In addition, the increased saliency of the cost – as clients become overtly aware of the fee when they have to keep writing a new check for it – can make the client more fee-sensitive. Some advisors try to ameliorate this by simply requiring one annual fee, instead of ongoing quarterly or monthly retainers. But then clients get “sticker shock” when they see the annual fee all at once, and some simply don’t have the free cash flow to pay an advisor’s lump sum annual fee all at once (in a world where we pay almost everything else on a monthly basis!). And annual fees can wreak havoc on the advisor’s business cash flow as well, compared to the smoother process of regular quarterly AUM fees, especially if the firm tries to systematize its billing process by doing so all at once every year (which means a year’s worth of revenue hits just once a year, all at once!).
Ideally, financial planning fee payments could be processed through an existing payment processing platform, to facilitate billing client bank accounts (via ACH) or even a credit card, but unfortunately today’s most common platforms aren’t very feasible for financial advisors.
For instance, PayPal can handle one-off transactions, but is very limited on setting up recurring billing across all the clients of an entire advisory firm on a set date and schedule. Nor is PayPal structured to provide the kinds of “confirmation” payment invoices that some state regulators require for client notification.
And while competitor PaySimple is more capable, it’s arguably too capable, and provides such flexibility in setting up recurring invoices with a client’s bank account information that the ability to go in and change fees after the fact could potentially be deemed custody for an RIA. In addition, PaySimple has no portal for clients to manage (or shut off) their own fees.
Meanwhile, the platform with the deepest integration between invoicing and payments – the Quickbooks Merchant Account – states in its Accepted Use policy that any “Financial or other Regulated Products, Services, Securities, and Stored Value” is not permitted to use their platform to process bank ACH transfers or credit card transactions, which means regulated financial advisors structured as an RIA (as legally required) would be prohibited from using a Quickbooks Merchant Account altogether!
The bottom line: there is a severe lack of (compliant) payment processing solutions to automate billing and payments for fee-for-service financial planning!
Introducing AdvicePay: Compliant Payment Processing For Financial Planning
To help fill this void in the financial advisor marketplace, I’m excited to announce that we’ve launched a new company: AdvicePay.
The purpose of AdvicePay is simple: to facilitate – in a compliant manner that doesn’t trigger custody – the invoicing and payment processing of financial planning fees, including the automation of recurring financial planning retainer fees (or an ongoing “subscription fee” for financial planning services).
The software allows for financial advisors to collect financial planning fees through either ACH (bank account transfers) or via a credit card. And it can facilitate either a one-time payment – for instance, to handle an upfront planning fee, or a pay-on-the-spot hourly financial planning fee – or a recurring retainer fee, whether billing monthly, quarterly, or annually.
To avoid any risk of custody, though, financial advisors themselves do not have access to client bank account or credit information themselves, which instead is entered directly into the AdvicePay portal by the client. In addition, any change in (recurring) financial planning fees will automatically generate a notification to the client for approval, to obviate any risk of triggering custody by having “too much flexibility” over the fees extracted from the client’s account.
To further facilitate the ease and accessibility for the consumer, AdvicePay also includes its own a client payment portal, where clients can see their financial planning fee history with their advisor, update their payment information, or if they wish to, terminate their recurring payments with their advisor (an important consumer protection from the regulator’s perspective).
The AdvicePay platform also provides an advisor portal to view all financial planning fee information in one place, from tracking client payment activity and generating reports, to initiating electronic invoicing, and managing notifications of payment problems (e.g., where client credit cards expire or bank accounts have an insufficient balance to complete the financial planning fee payment). Along with the ability to provide the kind of detailed reports that regulators may request in the process of a state or SEC examination process.
Expanding Access To Financial Planning With Fee-For-Service Business Models
Initially, we had built AdvicePay simply to facilitate payment processing for the monthly retainer fee model we champion at XY Planning Network. Having lived on the “front lines” of state securities regulators reviewing this fee-for-service business model – and hearing the regulators’ concerns about the capabilities of existing payment processing platforms that provided either too little flexibility for clients (i.e., lack of invoicing and client notification capabilities, and the inability of consumers to stop recurring payments directly), or too much flexibility for advisors (i.e., access to client bank account or credit card information, or the ability to change/raise fees without client notification which potentially triggers custody), we saw an opportunity to solve the problem for what are now 570+ financial advisors in XYPN.
Ultimately, though, we have decided that the need for payment processing to expand the ability of financial advisors to offer fee-for-service financial planning goes beyond just XYPN. In fact, the market potential for doing non-AUM fee-for-service financial planning may be even larger than the current segment of consumers being served in an AUM-centric manner! And as a result, today we’re opening up AdvicePay to the broader financial services industry.
And so for a platform fee of $50/month, and a processing fee 1.5% for ACH transactions and 3.5% for credit cards, any financial advisor will be able to use the AdvicePay platform to grow their non-AUM fee advisory business (in a compliant manner!).
We expect that this will be appealing to anyone who charges standalone financial planning fees to their clients, whether as an individual advisor, or an enterprise (large RIA, or broker-dealer with a corporate RIA) that wants to encourage for financial planning fee activity across all the advisors in the firm. Especially as DoL fiduciary is driving even more broker-dealers to shift advisors under their corporate RIA, to do both level AUM fees and a growing volume of financial planning fees!
However, we believe that the real opportunity in AdvicePay – and the industry at large – is not just to charge fees for financial planning, but to build financial planning businesses using recurring retainer fees as a recurring revenue model akin to AUM.
Because the fundamental challenge of most fee-for-service financial planning is that, while it may better fit the DoL fiduciary rule because it’s unconflicted from product transactions, it’s still transactional in nature. Clients have to decide they have enough pain to pay for services, and buy each bit of advice incrementally. Rather than paying for an ongoing financial planning relationship through an ongoing financial planning fee.
With AdvicePay, advisors will be able to set up recurring retainer fees, on an annual, quarterly, or even more bite-sized monthly payment schedule, improving the stability of the advisory business (and its valuation) with recurring revenue, while creating a business model far more conducive to a bona fide ongoing advice relationship.
Because ultimately, it’s not enough to just try to shift from offering investment management services to financial planning services. An effective business model, and payment mechanism, that align the services being delivered with the sustainability of the business, is crucial for long-term success. That’s what the industry has witnessed over the past two decades with the AUM model, and we’re excited to think that this may be the starting point of the emergence of recurring-revenue fee-for-service financial planning – in the form of various retainer fee and subscription fee models – as well! And who knows – perhaps someday, financial advisors will just charge for financial planning, and give away the investment management services for free!
And so for all these reasons, we’re incredibly excited about the launch of AdvicePay, and recently raised $500,000 of additional seed capital specifically to expand AdvicePay to the broader financial services industry, and with an aggressive roadmap of developing further enterprise capabilities (for the unique needs of large multi-advisor RIAs and hybrid B/D-RIA firms), to facilitating more types of net-worth-and-income and complexity-based retainer fees, and future integrations with financial planning, CRM, and portfolio accounting technology solution for advisors (to better facilitate coordinated billing). We hope that AdvicePay helps to both expand the reach of financial planning and make it more accessible, and encourage the creation of more stable and sustainable fee-for-service financial planning firms in the future.
In the meantime, take a look at the AdvicePay platform itself, and let us know what you think!
(Disclosure: Michael Kitces is a co-founder and partner in AdvicePay.)
So what do you think? Have you struggled to find a compliant way to bill for fee-for-service financial planning? Will compliant payment platforms help expand access to financial planning services? Please share your thoughts in the comments below!
Michael, I think that this sounds like a great service, but for me its a little expensive. I use Quickbooks and intuit payments. I guess they could terminate me for using it for financial services, but so far they have not. The $50/month fee is higher than my entire Quickbooks Online subscription. Also the 3.5% per credit card transaction is on the high end of payment transaction fees.
You might be able to get this fee for now, but there are new payments services all the time and most of them are going to a cheaper product. If you want to grow this big, I suggest something like $10/month. At that price point it becomes a no-brainer and this product could become the gold standard for the industry. At $50, I will continue to look elsewhere. The number of clients I have to bill per month is just to low and the Intuit solution works.
While I think you are right that there are cheaper services out there that do billing, as Michael pointed out, they are not exactly compliant or ideal. They are also a brand new company so they need to charge what is necessary to fund the expansion of the system’s capability and reach. Later, when they break even and begin to scale, they could possibly lower their price. I think it is a great step in the right direction. Well done Michael!