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What is subscription-based financial planning?

November 13, 2021

What is subscription-based financial planning?

Before I get into what subscription-based financial planning is, I think it is important to understand how traditional financial advisors are paid.  Traditionally, financial advisors are paid in two ways.  First, they are paid on what is called Assets Under Management or “AUM”.  This is when a financial advisor manages and invests assets for you (think an IRA, or a managed brokerage account).  An example of this would be, if you have a $100,000 in an investment account and the financial advisor charges you 1%. Your annual fee would be $1,000 (there are often additional fees, but we aren’t going to cover that in this post).  The other way most traditional financial advisors are paid is through the sales of insurance products.  Typically, when a financial advisor sells a life insurance policy, long-term-care policy, or disability policy the financial advisor is paid a percentage of the first-year premium and a smaller residual each year the policy stays in force.  Contrary to popular belief, the insurance premium that a client pays, does not include the commission to the advisor directly (keep in mind the premiums paid to an insurance company do fund the liabilities of the insurance company) .  Financial advisors or agencies negotiate contracts with insurance companies on compensation.  If the commission was included, someone with the same health status would have a different premium depending on who sold them the policy….also another topic for another day.  Full disclosure, I provide both investment management and insurance services to my clients but don’t require it to work together.

So, if it has been this way for decades why do something different?  Well first off, it is my opinion that there is an inherent conflict of interest in this business model (all financial advisors are required to disclose this).  You have probably heard the saying “we are on the same side of the table” or “when you make more, I/we make more”.  Which is completely true.  If you invest with a financial advisor, they are going to do everything in their power to make sure your balances increase, which will also increase the fee the financial advisor receives.  In a scenario like this, even the best financial advisors can lose at least some objectivity.  If you are getting paid based on AUM, the ultimate goal of the financial advisor from a business perspective, is going to be to get MORE AUM.  In my mind, this structure could skew even the best advisors. That being said, Investment Advisor Representatives “IARs”, are held to a fiduciary standard when providing certain Investment management services, but at the very least it is still an inherent conflict of interest. In addition, today investment management is a commodity.  It doesn’t matter who you go to, it is all done basically the same.  If all you are looking for is pure investment management, you aren’t looking for a financial advisor or financial planner you are looking for an investment advisor.  What makes this even worse is the investment piece and the returns most people chase aren’t even the most important aspects of a financial plan.  They don’t consider many important factors like cash flow, savings rate, personal goals, or even expenses.

So, the real question is…… ”Is there a better way?”.  I think there is.  I think subscription-based financial planning is the answer.  Subscription-based financial planning, is a financial planning engagement where a financial advisor creates a financial plan for a monthly fee.  This doesn’t require a client to have the advisor manage their assets or place insurance.  Once the financial plan is ready for implementation, you could absolutely implement the plan with the financial advisor, and that may have more costs or fees, but it isn’t a requirement for the plan itself.   This isn’t going to be for everyone, and that is fine, but I think for most people out there, it is a good alternative.  When we talk about financial planning and fees, we have to address what you are paying for.  In my opinion, the planning is the most important not investment management.  I am not here saying that investment returns don’t matter, but what I am saying is, if you get the big things right, they are much less important.  If we focus on a proper protection plan, a world-class savings rate, and living within our means there really isn’t as much of a need to chase investment returns. 

Secondly, it allows you to work shoulder to shoulder with your financial planner and have confidence in their objectivity.  Sure, if you decide to place insurance or investments with the financial advisor they will be compensated above the fees of the plan, but they are not only relying on those commissions & fee’s because you are already paying a financial planning fee.  The financial advisor is going to give you sound advice, and at that point, it is up to you to decide if you want to implement the plan yourself, have the financial advisor help do it for you, or if you do anything at all for that matter.

Lastly, I think it is important to understand why I think subscription-based planning is the right approach.  I have been in the financial services industry for 14+ years, and I started at a few of the very large financial institutions that anyone in the US will know.  These firms provided great financial planning to their clients.  The problem in my mind though was the barrier to entry.  These firms required one million, 3 million, 5 million dollars to gain access to planning services.  This is great for those families with multi-generational wealth, but what about everyone else.  You know, those people that financial planning could have a positive monumental impact on?  I believe that everyone should have access to good planning.  It doesn’t matter if you have a household income of $50,000 or $1,000,000.  The basic concepts apply regardless of income level.  What separates most people with great financial plans, is simply financial education and consistency.  This is why I believe so strongly in the subscription-based approach, and it is my mission to help as many people as I can.