Financial Planners Use New, Hybrid Model for Next Generation of Clients - TheStreet

Financial planners have fretted for years about recruiting the next generation of clients as Baby Boomers move into their golden years and the Greatest Generation bids adieu.

After all, Gen Xers and millennials only form a small fraction of their client base.

However, it's not necessarily what planners are saying that is turning off younger clients, but rather how they are pitching and charging for their services, a new report by Simon-Kucher & Partners, a global marketing and strategy consulting firm with a specialty in pricing.

The traditional model advisors have used to get paid, charging a fee for assets under management, or AUM, still works for a significant, but declining, number of older, high-net-worth clients, the report notes.

But the AUM fails miserably when it comes to recruiting young professionals and others who may have high incomes but few invests to manage, the study finds.

In order to start building a younger clientele, financial planners will need to roll out new ways of charging for their services, and new ways of talking about them as well.

For the study, Simon-Kucher& Partners studied financial planning firms that have already made the jump and have found success attracting the next generation or two of clients.

Relying solely on the old AUM model "limits the amount of clients you can serve," notes Matthew Jackson, a director who works in Simon-Kucher's financial service division. "You cannot service someone without assets. You are inviting future clients to consider other options, and, if you do that long enough, you are going to cut away the future of your business."

A New, Hybrid Model

Financial planners routinely get warnings the AUM model is facing eventual or even imminent doom.

But rolling out new ways of charging for their services to attract new clients should not be an "either/or" proposition for financial planners, Jackson says.

Advisory firms that have successfully rolled out new ways of charging for their services have also continued to use the AUM model for some clients as well.

Rather, the problem comes in trying to make the AUM model - charging a fee based on the amount of assets managed - fit for younger clients, especially the coveted HENRYies, or (high net worth not rich yet).

These clients have lots of complex financial issues to deal with and are in need of sound advice, but their lack of assets makes them poor prospects under the AUM model, Jackson notes.

Planners have a number of approaches they can use to get around this stumbling block and bring in the next generation of clients.

One way is to broaden the definition of assets under management to include things clients own beyond investments, such as their homes or savings. Firms can also charge a lower minimum fee in order to attract younger clients with relatively small or modest invest portfolios.

But this still doesn't work for younger clients who may still have high incomes - dentists, doctors and lawyers - but high levels of debt and no investments. For this group, a percent of income - say out of monthly cash flow - might be an option, the report notes.

Cutting Jargon

It's not just their fee structure that planners have to revamp - it's also how they talk about their services to client, according to the Simon-Kucher report.

"The financial advice profession is shrouded in a blizzard of impenetrable acronyms, densely worded descriptions and lamentably uninspiring jargon such as 'cashfow modeling,"' the report points out.

Complicated-sounding jargon once worked to the advantage of advisors, who "traded for years on the obscurity of the field in which they operate."

But those days are fading fast, and especially when it comes to younger clients.

"This worked best in the age of the trusting, deferential consumer," the report notes."But that age is fading, and clients today are actively comparing advisors to the competition, starting with the fees they charge."

Fuzzy sounding holistic language just won't cut it. Younger clients want to know exactly what services they are buying and how much they cost.

One firm cited as an example in the report offers a detailed "financial re-org" plan for clients that includes eight action items, such as a "30 Minute Assessment Call" and a "90 Minute Discovery Call to discuss what money is needed and wanted for, and if you have any pressing concerns." Other items on the list include an "actionable" financial plan and quarterly meetings.

The price of the package: a flat fee of $1,500 to $2,500 and a monthly payment of $149 to $175 for ongoing services, according to the report.

While financial planning firms may like to hold pricing information close to the vest, to attract affluent, younger clients they shouldn't be afraid of being transparent, to the point even of posting pricing information on their websites.

It can also help to build trust and act as a "time saver as well, weeding out the tire-kickers who are simply looking for the cheapest deal they can wrangle.

"Fee transparency ... communicates that the firm has nothing to hide, which is a powerful message in a profession blighted by scandals," the report observes. "Furthermore, it acts as a screener, selecting for clients who are truly serious about solving their financial issues."