FinTech Conversations: How wealth managers are creating new revenue models

How are wealth managers creating new revenue models? In this blog, we cover the transition from investment management fees to a fee-for-service model across broker-dealers through a conversation between Patrick Noonan, Product Manager at Advisor360°, and Bill Winterberg of AdvicePay.

The concept of charging a separate fee for creating financial plans, instead of bundling the fee with a standard asset management fee, isn’t new. Though, according to Bill Winterberg of AdvicePay, it may be beginning to hit its stride; however, this fee transition inflicts both excitement and growing pains for many top financial advisors.   

Patrick Noonan: We are seeing this trend accelerate because clients’ expectations of advisors have started to shift over the years. Clients are no longer just looking for investment management advice with a retirement plan; they expect their advisors to help them navigate all of life’s financial and planning decisions beyond saving for retirement and education.

They are looking for cash flow management, business succession planning, help evaluating pre- and post-retirement healthcare options, and legacy and charitable planning. As these expectations grow, so does the advisor’s need to better illustrate what they bring to the relationship. How better to differentiate yourself from your competitors than clearly detailing all you do for the client beyond investment management?

How is this billing transition progressing and why is it important?

Bill Winterberg: When reps bundle all their services into a single asset management fee, clients often struggle to evaluate the value they receive for a variety of services that are delivered by their advisor. It’s the challenge of clients not being sure how to weigh the investment management services they receive versus the planning services.

This struggle is driving firms to move toward a fee-for-service model, with firms charging separately for their financial planning fees. By separating planning services from investment management fees, clients can better understand the services that they receive and the value that they hold. The first point is that it reduces that ambiguity of value from the client’s perspective.

Patrick: However, it seems that this transition is not only beneficial for clients but also for the firms themselves. Firms see their clients becoming more engaged in the planning experience when there is a separate fee for financial planning. This includes clients responding faster to emails and providing statements and data faster.

It’s a much more transparent way to explain the value you bring to a relationship by talking to your financial planning services versus about your investment management expertise. —Patrick Noonan

What are experienced advisory firms doing to add or split their revenue models/business?

Bill: Firstly, firms are offering a fee-for-service engagement for households that don’t have assets to manage. We will work with that household in a fee-for-service engagement and the advisor will determine what that price is. Clients are then able to pay out of their cash flow, which is great for households with recent college graduates who haven't had time to accumulate assets yet.

Next, firms are still requiring an asset management minimum. As you grow through your household and save and accumulate assets along with market appreciation, that household begins to graduate from the fee-for-service model into the comprehensive assets under management model.

Finally, advisors are establishing a very robust financial planning charge with high minimum planning fees; however, while planning fees increase, assets under management decrease and this balances out for firms. From a high level, the firm is potentially increasing their total revenue and firms are appreciating this because it allows them to decouple a portion of their revenue from the volatility of the stock market. They have this consistent recurring planning related revenue that is not subject to market volatility and now, instead of all their revenue fluctuating—or a significant portion—we're now cushioning and softening that revenue volatility because you have this consistent revenue on the planning side.

How do we change the structure of a relationship under the assets under management model?

Bill: We are publishing and offering materials to guide an advisory firm, a lead advisor, and a team of advisors on how to go through the steps of ideating, what a fee-for-service offering looks like, and getting them to the point where they are officially charging and billing for fee-for-service engagements.

Patrick: Here at Advisor360°, we are helping our advisors shift the focus from investment management to a more comprehensive view of their financial lives. Our integrated platform brings together investments, insurance, assets, and liabilities to create that big picture view. Wealth Guide allows users to illustrate their planning process and show the depth of the areas they help clients with. For most of our users, they have been providing these services for years. Now is the time to make sure they value it.

Rania Kalaaji is a Marketing Project Manager Associate at Advisor360°, responsible for educating enterprise executives and building our community through content marketing and social media.