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Practice Management > Building Your Business

3 Financial Planning Business Models to Effectively Serve Gen X and Gen Y: Pt. 2

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In the first part of our post, we ran through the cheap and basic. Today, we’ll cover more comprehensive planning models.

Ideally, comprehensive financial planning services for today’s young professionals 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 referable 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

The greatest irony to the number of RIA firms that have $1 million 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 to $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 startup RIA (such as TD Ameritrade Institutional, 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/Gen 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. 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.


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