Momentum continues to move toward the advisory business. I think there are two reasons for this. First, we have unprecedented potential regulation coming in April 2017 favoring advisory business with fees tied to assets under management. Secondly, we are seeing a continued industry shift to more passive investments and lower cost models—both are forcing advisers to use the lower fee structures found in advisory models.
Many industry experts expect those fees to continue to be driven down over the next 24-36 months due to regulation and market forces. I agree. So, how can we prove our value to our clients and prospects and protect our revenue while working in the best interests of our clients? Below are a couple of ideas I think successful planners should attend to, now and in the future, to not only maintain their practice—but also grow it!
Fee Transparency: I’m not talking about simply telling clients how much we charge for our services. That has become a given because of regulation. And, more importantly, market forces—not the DOL—will make all our fees for services look very similar. So transparency will likely differentiate successful planners in the future. It’s appropriate to charge 25-40bps for assets under management and disclose that amount. It’s also appropriate to charge another 40bps for comprehensive planning with annual monitoring and/or quarterly reviews. And it’s also appropriate to charge a certain level of basis points when planning for protection-related issues—longevity, death, disability and chronic illnesses.
Vibrant Protection Platform: With an emphasis on passive investments coming from the DOL, it will be harder to justify a high-fee structure for clients when our services are limited to asset management. Absent of active managers, you might be setting yourself up for unhappy clients when you disclose the value of the fee. Having a protection platform will be critical for future success. Our clients are living 2.5 years longer for every 10 years in the United States. Our clients’ Number One Fear remains outliving their money. And, half of Americans underestimate their life expectancy. Talking about contingencies and mitigating those risks will be paramount in the new financial planning world. You have to have a team capable of executing on complex insurance and longevity issues in order to protect your assets under management and have any chance of retaining those assets with the next generation.
Collaborate: From the first night that I read the DOL rule, I have said that most planners need to come to grips with two questions:
1. Am I going to move up market?
2. If I stay in my current market, how do I become more efficient and capture market share?
Our industry is one of the most collaborative I have ever seen. We are willing to share clients for the good of the client. Our clients have complicated issues that require expertise in many specialties. Therefore, we have to be able to bring experts to the table for our clients. We not only need to have a quarterback mentality to direct and execute a financial plan but also bring in experts to have the most success. That coordination of talent, expertise and access is valuable to our clients. Having a “network” can bring value on top of your specialty, which may soon be subject to fee compression.
I can go on and on about changes in fee structure and the impact of regulation, but I think you get the idea—we have to look for different ways to earn our revenue from clients. That means we need to expand our services to platforms we haven’t been offering to date, including life, guaranteed income and chronic illness protection. Our clients will rightly expect a full accounting of our fee structure. Being able to clearly outline the value they are receiving will make it easier to have the fee conversation.
Don’t look at disclosure as a reason to reduce fees because the market is reducing their fee. Value will be important in the future. We simply need to redefine our value, change our practices to offer services that are important to our prospects and be transparent in the fee structure.
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
© 2018 Ash Brokerage LLC.