Financial planning knowledge to help you better serve your clients.

The business model of many financial advisory firms revolves around serving clients who are able to pay a certain minimum in annual advisory fees, which reflects not only the value that the advisor can provide for the client, but also the amount that the advisor must charge in order to provide the level of deep planning and investment management that higher-net-worth clients expect (while also earning enough profit to make the venture worthwhile).

However, because many next-generation clients such as those who are Millennials and Gen Zers are still building their assets up, paying $10,000 or more in advisory fees each year may not be feasible for them… at least not yet. This can create tension with the traditional advisory firm business model, because that minimum fee is often necessary for the firm to break even. As a result, serving next-generation clients may require adjustments to the firm's business model to deliver the services younger clients need while also remaining profitable.

In this guest post, Stacey McKinnon, Chief Operating Officer and Partner at Morton Wealth, shares a new business line her firm developed to serve younger professionals, the challenges that the firm faced in developing a sustainable business model to serve next-generation clients at lower cost than retirees, and some of the lessons her team learned from the experience that could be valuable for advisors who want to develop their own next-generation offerings.

At a high level, the challenge of serving next-generation clients is that, although they may not be able to afford higher fees, their financial needs are just as complex – if not more so – than those of retired clients. Importantly, serving next-generation clients effectively doesn't mean just offering fewer or more automated services (e.g., robo-managed portfolios) at a lower fee. Instead, it involves focusing on what clients value most and delivering that value efficiently, without adding unnecessary services that the client may not need or want. For example, most Millennial and Gen Z clients can open their own investing account and buy index funds online with only minimal guidance from their advisor, so full-service investing might not offer enough value to a next-generation client to justify an ongoing planning fee.

However, many next-generation clients have their own unique planning needs – ranging from equity compensation and tax planning to managing debt and even addressing ongoing anxiety about money and wellbeing. Advisors who can focus on and help resolve these issues for clients can prove incredible value to their clients. This, on one hand, requires deep expertise, meaning the firm may need to ensure its advisors have adequate experience and training to handle complex planning strategies that may be beyond the capacity of a relatively junior advisor. On the other hand, by focusing on a few key planning areas, the firm can deliver value more efficiently than one that tries to be "everything to everyone".

The key point is that while serving next-generation clients profitably may be more challenging in the short term, there's significant long-term potential in working with clients who are still accumulating wealth – and who may eventually inherit wealth from their parents. Because ultimately, many of today's high-net-worth retirees were once part of the 'next generation' themselves. Which means that advisors who can deliver value, build trust, and maintain strong client relationships today are positioning themselves to serve the high-net-worth clients of tomorrow!

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While the share of advisors with the CFP marks has risen steadily over time, today, about 2/3 of financial advisors are not CFP professionals. This means that, for most advisors, the decision to obtain this designation remains an open one. A crucial factor in an advisor's decision to prepare for the CFP exam – often requiring them to sacrifice evenings and weekends to complete the requisite coursework (which can take more than a year), and spending many thousands of dollars – is whether they will actually earn more as a result of doing so.

According to the 2022 Kitces Research Study on Advisor Productivity, CFP professionals take home more money per hour worked than non-CFP professionals, with this gap being substantially larger for service advisors than senior advisors. The typical service advisor without CFP certification earns $48.83 for every hour that they work, compared to $86.30 for service advisors with the CFP marks – a difference of $37.47, or a whopping 77% boost in income per hour! The typical senior advisor without the CFP marks earns $112.47/hour, compared to $120.00 for CFP professionals, a far more modest difference of only $7.53.

In this article, Michael Kitces and Mark Tenenbaum (Director of Advisor Research) explain this disparity in earnings per hour – dubbed the "CFP Productivity Gap" – and how it appears to be driven by explanations stemming from both the skills that CFP practitioners develop and deliver (supply-side explanations), and the preferences of clients – especially more affluent clients – when selecting an advisor to work with (demand-side explanations).

Specifically, service advisors with the CFP marks appear to spend more time on key revenue-generating activities such as meeting with clients and prospects and generating financial plans, and that these hours are put to good use because those CFP professionals both offer financial plans that are more comprehensive and update clients' financial plans more frequently than non-CFP professionals. As a result, teams with service advisors who hold the CFP marks tend to attract significantly more affluent clients than teams with non-CFP certificants, with a median client AUM of $1,000,000 AUM versus $250,000 AUM, respectively.

These wealthier clients also tend to pay substantially higher fees, which has a key implication for firms looking to attract and retain affluent clients: hire CFP professionals or help existing employees who have yet to earn their CFP marks obtain them. The knowledge obtained through CFP certification can forge a more planning-centric practice, offering financial plans that are more comprehensive and updated more frequently – which are clear value-adds for high-net-worth households who often have complex planning needs. Crucially, the research shows how the cost of employing CFP professionals (who command higher salaries than their counterparts without the CFP marks) is substantially lower than the revenue firms generate by employing them.

The CFP Productivity Gap also has profound ramifications for the income growth of service advisors throughout their careers. While senior advisors tend to see income growth over time regardless of their CFP certification, non-CFP professionals fall farther and farther behind their counterparts who are CFP practitioners over the course of their careers. Indeed, for service advisors, the CFP Productivity Gap grows from an earnings difference of $8/hour for those with less than 8 years of industry experience to over $50/hour (which adds up to $100,000+/year in greater earning potential) for those in business for 20 or more years. Hence, CFP certification appears to be a crucial vehicle by which service advisors can experience continued income growth over time without stalling out.

The key point is that service advisors earn substantially more by obtaining the CFP marks and firms are likely to benefit from supporting them in doing so. This helps the firm expand its teams of service advisors who can take on and support the firm's most high-dollar clientele. Which, in turn, frees up the capacity of senior advisors to continue to bring in clients and grow the firm further!

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