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: