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The couple’s financial picture was complex, but at the same time, not outside of what wealth advisors are confronted with every day. Here’s a snapshot:
- They had one large joint investment account, two 401ks with existing employers, three 401k/403bs with previous employers, two traditional IRAs, one Roth IRA, one 529 plan and nine other investment accounts at three different custodians.
- They were building a new home for $800,000 and had allocated $400,000 in cash for a down payment and mortgaging the balance.
- Selling their current home, without an agent, was under consideration.
- The wife was the larger earner, and it was uncertain whether her disability policy was adequate.
- While both were maxing out their 401ks, one spouse had recently decided to put half into the Roth 401k, costing them over $4,200 in taxes.
- The couple has two children and a 529 education fund, but as it was administered outside of their home state, they were not getting the eligible tax deduction.
- They had gaps in their home auto policies and no umbrella liability coverage.
- They had not gotten around to implementing wills or trusts.
These circumstances demonstrate how the traditional wealth management model and AUM fee structure are wholly inadequate to address the challenges faced by individuals in families. In the above case study, a wealth advisor could principally be engaged in only the investment accounts. Meanwhile, the clients’ financial concerns extended well beyond investments.
This is one reason the couple was attracted to subscription-based financial services. As the wife said to me, “We need investment management, yes, but also a set of concierge services to manage our finances as our situation evolves.” The right menu of services was valuable to them, and they readily agreed to a monthly subscription of $265.
Flux
The wealth management industry is in a state of constant evolution, and the next “paradigm shift” is always over the next horizon.
In the best-case scenario, subscription services are the heir apparent for the delivery of wealth management services because they bestow the greatest amount of flexibility on the advisor to help their clients achieve comprehensive and lasting financial security.
In a more modest case scenario, subscription services assume their position as an able competitor to other wealth management models.
But what’s “best” needs to be evaluated from two perspectives: for individuals and for advisors. With respect to the latter, the correct answer may be as much based on temperament as it is on dollars and cents. For advisors who want to engage in the whole of a client’s financial well-being, and are qualified to do so, the answer is yes. As for the earnings potential, we’ll cover that later.
Sales cycle
Overall, the process toward subscription is not so much a conversion, but a slower, ongoing transition for the book’s client base.
First, clients must be aware that a subscription-based service is available and consider how it might be beneficial to them. And even then, clients need to be confronted with a situation when extra services could produce a multiple of value versus the cost.
Our advisor who is converting his book has found that written communications about subscription pricing were generally not effective in converting clients to the model, and the shortest route to conversion came from meeting with clients.
The interpersonal communication that proved effective in converting clients to subscription services stemmed from the fact that a subscription approach is nuanced and requires explanation. By contrast, the beauty of the AUM fee model is also its worst feature: simplicity. It’s easy to understand, but it’s a blunt instrument, and when deconstructed, does not serve all clients well.
The linchpin
The linchpin in subscription-based financial services is tax return preparation. Tax returns are the Rosetta stone for a client’s financial picture. They are a history book and a map rolled into one. They show where a client has been financially and provide a path forward for where clients need to go.
However, in conventional financial planning, the two largely are completely disconnected. A tax accountant may be aware of what the advisor is up to through, say, a 1099 filing, and the advisor may know a client’s tax liability through, say, asset liquidations, but regrettably, that may be the extent of their awareness.
Under a subscription model, the tax return is the hub, and items like Medicare and Social Security elections, retirement spending, tax-deferred contributions and 529 liquidations are the spokes.
This is very different than the conventional constellation in wealth management, where tax and planning operate in separate – and sometimes competing – silos. In one case, in the switch to a new accountant, the tax preparer found an error in how market losses were recorded, resulting in tax savings of approximately $40,000.
Dollars and cents
The scenario described at the top of this article came with a twist. The couple wanted to manage the assets. There was no AUM fee whatsoever. They asked for an asset allocation, and this was included in the subscription they paid. But ultimately, the subscription was based solely on the value they received from activities outside of investment management. And depending on their success or lack thereof in implementing the investment policy, there may be an opportunity to discuss enhancing the subscription to include money management or a traditional AUM model.
But what’s important for advisors to keep in mind is that subscription services are not an all-or-none proposition for the simple reason that not all clients will accept or are appropriate for a subscription.
These figures come from the advisor in our shop transitioning his clients to subscriptions:
- Overall, his book consists of approximately 150 accounts totaling $150 million.
- Among his client base, approximately 15 percent were not viable for subscription services, because they needed little to no services.
- Among the balance, approximately 60 percent, or 75 clients, expressed resistance to a subscription fee.
- The balance, about 50 clients, were constructive on the plan, but uncertain whether or not to proceed.
- Eventually, about 25 percent of the assets in the book converted to a subscription model.
Ultimately, it’s not as if the client must choose one model or the other. Rather they can choose one or the other or some hybrid combination that suits their needs. This flexibility is what can strengthen the advisor/client relationship and is one of the reasons the subscription model represents such an important evolution in how wealth management services are offered.
Daniel J. Friedman is a Founding Partner and CEO of WMGNA, LLC Tax-Out Financial Solutions™, a firm that employs a tax-out approach to financial planning. He is a frequently sought-after guest on the local major TV outlets and characteristically delivers his opinions in an interesting and humorous manner and always has a fun and unique take. If you ask him, you will find out. He has been featured in several prominent industry magazines as well. Mr. Friedman serves on the Advisory Board for The Miracle League of Connecticut. He also served on the Connecticut State Insurance and Risk Management Board from 2013-2019. Mr. Friedman received a Bachelor of Arts in History from Denison University in Granville, OH. Daniel currently resides in West Hartford, CT. He is the loving father of three adult sons.
Brian P. Beck, CPWA® is a Founding Partner, President, and CFO of WMGNA, LLC, a Tax-Out Financial Solutions™, a firm that employs a tax-out approach to financial planning. WMGNA is headquartered in Farmington, CT, with an additional office in Boca Raton, FL. He is a Certified Private Wealth Advisor®(CPWA), a designation offered through the Investments & Wealth Institute. The CPWA® was created in partnership with the University of Chicago Booth School of Business for financial advisors who have worked with high-net-worth individuals. In 2010, Brian won the Hartford Business Journal's prestigious CFO of the Year Award for the Small Private Company category. He has been featured in various publications and news outlets, such as Newsweek, The Hartford Courant, the Hartford Business Journal, Parent Magazine, Fortune Small Business, and NBC Channel 30. Born in Bloomfield, CT, Brian graduated from Bloomfield High School. He continues to give back to the school with the annual "Alan L. Beck Award," a scholarship presented to the top academic athlete. Brian currently resides in Delray Beach, FL, with his wife and two daughters. "Over the last 25+ years, it has been my pleasure working with so many interesting and wonderful people."
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
