Even though I’m not a CFP, I have a degree in financial planning and actively support the financial planning program at Kansas State University by raising money, teaching classes and accompanying K-State students on their annual trip to the FPA national conference. I have always believed in the value of financial planning services, but years ago there was one shining moment that nearly changed my perspective, and not for the good.
In my business master’s program, we were tasked to examine a business model which the teacher found to be useless (i.e., you couldn’t prove its value by its profitability) and for me, he diplomatically picked the financial planning model.
So I did exactly what the professor asked us to do. I took a hard look at the independent advisory business model, and concluded (based on the numbers alone) that financial planning services were a costly drain on the healthy revenues from managing client assets. Asset management is hugely leverageable: you can manage $1 billion or $2 billion almost as efficiently as you can manage $100 million. But financial planning is both labor intensive and time consuming. Advisors and staff spend long hours exploring each client’s overall financial picture, running projects, tracking assumptions, and monitoring myriad loose ends involving jobs, children, relatives, insurance, retirement plans and, now, medical care.
After each student completed the analysis of the respective business models we had to present our conclusion to the class. In my situation, the right answer to this assignment was that the financial planning model was unworkable from a numbers (profit and loss) perspective. However, I simply could not make myself stand in front of my peers and defend the conclusion with any conviction. So, much to my teacher’s disliking I said this instead and I still believe it today:
“While you can sit here all day and ask me to prove financial planning isn’t a very good business model, I cannot stand here and defend the conclusion because I don’t believe that the financial planning business model can be determined useless by profit and loss alone. The advisory business isn’t really about financial advice nearly as much as it’s about people: the clients and the employees. Please tell me how you can apply a number to a person. How much are you worth? How much is that client’s life worth? Show me a number for that.
“Every successful business depends on two things: keeping existing clients happy and attracting new clients—including an advisory business. What’s more, if you do these two things and have great employees who believe, like I do, in the value of the life they are protecting it takes much of the pressure off those “marketing” efforts. Aren’t happy clients the best marketing there is?
“It’s true that simply managing client assets can be great business model: just look at the giant mutual fund companies. But a closer look shows that most of them have astonishingly high investor turnover rates—and consequently, spend fortunes on marketing to replace them. Independent advisors don’t have those kinds of financial resources, which takes me back to the viability of financial planning business model.
“I’ve found two interconnected reasons that offering financial planning services makes advisory firms more profitable and thus, viable:
1) Financial planning strengthens client relationships.
“By being involved in virtually every aspect of a client’s financial life, it makes an advisor part of that client’s life: where the children are going to college, how a parent’s doing in the nursing home, how their job is going, where they are thinking about retiring, etc. It gives an advisor many opportunities to show that they truly care about their clients, and to tangibly have an impact on their lives in very meaningful ways beyond just money. These are the kinds of relationships that people tend to tell their friends about—which accounts for the high rates of referrals among financial planners.
2) Financial planning takes the focus off investment performance.
“As I said, these two reasons are related: great, personalized services other than managing client assets gives advisors something to talk about other than investments. Now don’t get me wrong: investment performance is important—and should never be hidden from a client. Yet keeping clients focused on their long-term goals rather than short-term market moves is one of the biggest challenges that financial advisors face. Experience tells us that looking at their bigger financial picture helps clients refrain from making short-term mistakes. What’s more, it positions the advisors as more than an investment manager, who can work with clients to fire one of their current managers, if necessary. Simply put, being a financial planner puts the advisor on the clients’ side of table, helping them to get what they need from the financial service industry, rather than being a part of it.
“When you come down to it, in the independent advisory business financial planning isn’t a revenue stream: it’s a loss leader. It single handedly stimulates other sales of more profitable good and services, specifically investment management. I know this because if you actually research the industry and track firms that have broken out planning fees to smooth out AUM fees you will discover (although most owners will not admit to this) that after a couple of years, the vast majority of clients wanted to stop paying for the financial planning: they just didn’t see the value
“We see this industry wide: in the 40-or-so-year-history of financial planning, very few advisors have ever made a living doing only financial planning. But as a tool to keep existing clients and attract new ones by making a positive impact on their lives, there’s nothing better than financial planning. The financial planning business model, for purposes of this assignment, is priceless.
Why am I telling you this story? Over the 15 years I’ve been doing consulting, and as of late, I have a surprising number of clients and employees who are discussing decreasing the level of financial planning services they offer in their firms. I see this happen a lot when growth of new clients is strong and the firm starts to get overwhelmed with prospects. They start to think they can just take pieces of financial planning away to accommodate the growth of new clients and increase capacity of existing employees.
My point? Don’t do it. It’s a big, huge, ridiculous, devastating and, dare I say, [bleeping] stupid mistake. If anything you should be learning how to add more (read my last blog).