Executive Summary
Launching a financial planning firm is difficult. Not merely because of the cost and complexities of founding the business, and the challenge of getting new clients, but the opportunity cost of foregone income when you’re trying to build a practice and don’t have enough clients to be sustainable yet. In fact, for most advisors the “income gap” from when a practice is launched until it pays a livable wage can be many times the pure startup costs alone!
In the past, financial planners often bridged the gap by selling financial services products and taking the significant upfront commissions to round out their income in the early years. Yet in today’s environment, and especially in an advice-centric business, selling products for large commissions simply isn’t feasible or desirable… yet the lack of commissions and rising focus on fee-only firms ironically makes it even harder to bridge the gap successfully!
Fortunately, there are solutions, from doing hourly planning and offering standalone financial plans, to actually providing a limited amount of commission-based insurance solutions that clients actually need (and would have to pay for anyway), to easing into a practice by getting a job as an associate planner first or even getting a “side gig” to help make ends meet in the meantime. While these income gap fillers won’t necessarily fully resolve the issue – especially since the greatest challenge may simply be finding and getting clients in the first place – they can go a long way to at least partially bridging the gap and making it easier to survive the launch of a new firm!
The Opportunity Cost Of Foregone Salary When Starting Out As A Financial Planner
For a financial planner starting a firm, “the gap” is that space between when you start out as a financial planner, and when you actually have enough clients paying for (ongoing) financial planning to sustain yourself that way. And with most types of recurring revenue models, from Assets Under Management (AUM) to annual or monthly retainers, it can take several years to accumulate enough clients to achieve a stable base of business revenue, which means “the gap” can exist for years. In fact, for most new advisors, the gap is by far the single greatest “cost” in starting an advisory firm in the first place; startup costs for setting up an RIA can be as little as $10,000 or less, but the opportunity cost of years’ worth of foregone income (by not working in some other job/profession with more stable ongoing wages) can be huge, amounting to tens or even a few hundred thousand dollars!
The gap exists due to time it takes to build expertise, build trust, build relationships, build actual business, and accumulate sufficient number of clients, to actually get paid (and paid enough) for what you do. And while the gap has existed as long as financial planning itself, it’s notable that today’s financial planners are compelled to fill the gap in a very different manner than the founding generation of financial planners. For instance, in 1980 the average front-end load an investor paid for a mutual fund was 5.6%, and while costs started coming down since then by 1990 the average front-end load actually paid by an investor was still 3.9%. Which means in decades past, an investor with “just” $100,000 in investible assets would generate a roughly $4,000 - $5,000 commission, payable immediately and in full. By contrast, an advisor in today’s world operating as an RIA and charging a 1% AUM fee will generate a quarter fee of $250, and the first payment of that fee might not occur for another month or two until the next quarterly billing period!
Of course, it’s worth noting that the advisor of the past who was focused primarily on selling A-share upfront-commission mutual funds wasn’t necessarily trying to be a financial planner in the first place. And that’s actually part of the point; most of the first generation of financial planners didn’t actually start out as financial planners. They started out as insurance agents or mutual fund sales representatives, who sold their financial services products to make a living for many years. At some point down the road, either to deeper their business, expand their services, or simply to move away from a product-centric focus, they sought out education as a financial planner and began to adopt a more planner- and advice-centric approach to working with their clients.
Which means while today’s financial planners may be the second generation of planners, they are the first ones to enter financial services and try to start a financial planning practice from scratch on day 1. And in an environment where the large upfront commissions of old just aren’t feasible nor practical when delivering an advice-centric solution, today’s financial planners require entirely different approaches in trying to solve the income gap as a new financial planner starting out!
Side Hustles, Upfront Planning Fees, And Other Ways To Bridge The Income Gap
So how can a new financial planner bridge “the gap” when starting an advice-centric firm, where it’s not viable (nor desirable) to take on a product-centric focus? There are a few options…
Hourly Fees. If selling small ad-hoc financial services products as needed for upfront commissions was the gap-filler for the last generation of financial planners, selling ad-hoc hourly financial advice may be the primary gap-filler for the current generation. While long-term relationship-based clients (that generate recurring revenue) are important for the long-term health of most advisory businesses, not every consumer wants and needs a comprehensive relationship, and providing hourly as-needed advice fills a void for consumers and an income gap for new advisors.
Project Planning Fees. For some people, their needs go beyond “just” an hour or few of advice, and require a full comprehensive plan. Doing standalone plans for a $1,000 - $3,000 fee can go a long way to bridging the income gap. Such plans might be offered as an expanded solution for clients who need more than “just” an hourly solution, or as an additional (and separately priced) upfront service for clients who will eventually work with you on an ongoing basis (e.g., every AUM client will pay ongoing AUM fees, but also a $2,000 upfront planning fee, though be cautious that your upfront fees aren’t so high they discourage clients who would have more long-term value to the business by not charging so much upfront!).
Insurance Commissions. Notwithstanding the industry’s current swing towards fee-only financial planning, and the goal of starting an advice-centric firm, the reality is that many clients really do need various forms of insurance products, including term life insurance, disability income insurance, long-term care insurance, and even health insurance. Whether you intend to receive a commission or not, the end cost to the client is typically exactly the same, because these products are built with “distribution costs” (i.e., commissions) already embedded into the premium. So you can give your clients the insurance advice for free (or for a separate fee) and then send them to TermInsurance.com to buy it, or you can help them implement it directly. The cost to the client is the same, the only difference is whether you’re paid to help the client implement, or if you help them implement the solution and send the commission to TermInsurance.com. While some larger and established advisory firms decide “it’s not worth the trouble” to go this route, for a newer planner aiming to bridge the income gap (or even to sustain as part of an ongoing business model), that’s a non-trivial amount of business revenue to have the client purchase something they already need and that you were recommending to them anyway!
Start As A Paraplanner. Another option to bridge the income gap of starting a practice is simply to not actually start one from scratch right away in the first place; instead, check the job listings for a role as a paraplanner/associate planner in an existing firm and aim to do that for a period of years. With the job as a base, you can then either seek to build a client base in parallel to your job, or simply start to establish your professional network and build relationships with potential referrers who can send you clients in the future. A crucial caveat to this process: be certain the firm that hires you is on board with the plan! This is not only because working with “outside” clients must be disclosed to and generally overseen by the firm (for compliance purposes), but also because it’s important that your expectations about establishing clients is consistent with the goals of the firm. Some advisory firms are more than happy to have associate planners begin establishing their own clients and bring in revenue; other firms welcome all planners to get clients, but may impose the firm’s minimums (which could make getting new client impossible in practice); and a few firms specifically design their associate planner positions assuming the planner is fully committed to the firm and will not be doing outside activity as well. Better to get everything out in the open up front about what your long-term plans and intentions are and ensure there’s alignment with the firm, than follow a path that’s almost certain to burn a bridge in the future.
Get (Or Keep) A Side Hustle. For those who can’t find work as a paraplanner to make ends meet, the next alternative is to find some other work - a "side hustle" - to help bridge the income gap. Some will use skills from their prior profession on a freelance basis, or even keep an “old” job as they transition into financial planning (especially helpful sometimes for transitioning as a career changer into financial planning). The biggest caveat to this approach of getting a side hustle as a new financial advisor is that ultimately, it takes a lot of work to learn the skills, build the networks and relationships, and establish yourself as a financial planner, and this can be even harder if the job filling the income gap has no connection to financial services to at least be a partial stepping stone. Thus, ideally the “gap job” would/should be something related to financial planning and financial services in the first place, from consulting with other advisors, to providing outsourced support work or even doing intern work (something is better than nothing!), to doing freelance writing on financial planning/personal finance topics.
Of course, the caveat to almost all of these approaches is that you still need a process to get clients in the first place. The good news is that there are many paths, including lead-generation networks like NAPFA, Garrett Planning Network, or XY Planning Network (if your business model fits one of those platforms). For many of these gap-filling approaches, one of the best paths to new clients is simply building relationships with other (local) advisors whose businesses are bigger and may not be interested in working with “smaller” clients but are happy to refer it out to a trustworthy fellow advisor… especially one for whom those clients would be great for bridging the income gap and getting the business going.
Ultimately, the reality is that most of these income-gap-filler strategies will only go “so far”, especially in the first year or two, because even with some lead generation and client referral opportunities, there are just only so many clients a new advisor can get. Nonetheless, building on this systematically over just a few years can quickly close the gap; for instance, just working with 1-2 new clients per month for a small monthly retainer fee and a modest upfront planning fee, and doing another 2 hours of hourly planning on the side, can quickly compound to more than $150,000/year of revenue in just 3 years (though obviously take-home income after business expenses will be lower), and the upfront and hourly "gap-filler" revenue can be as much as 20%-40% of revenue in the early years!
The bottom line, though, is simply this – if you’re looking to start a financial planning firm, recognize the challenge of the income gap early on, the opportunity cost it represents, and have a plan to tackle it. While the biggest constraint may simply be the pace at which new clients can be found, having a means to generate some additional revenue by finding more finite ways to work with clients in a limited engagement and get paid for it can go a long way to bridging the gap and growing the business to the point that it sustains itself.
So what do you think? How did you manage the income gap when you launched your advisory firm? If you’re still thinking about launching your firm, what’s your strategy to bridge the gap?
