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Financial Planning For The Masses Works – As Long As You Can Really Reach The Masses!

By Michael Kitces, CFP

It has long been a criticism of financial planning that it is focused too far up the wealth scale. Financial planning firms in the US at best only start serving the “mass affluent” (typically defined as $100,000 to $1 million in investment assets), and the elite independent firms often have minimums of one or several million dollars. The only exception is typically the younger high income earner, who may not have sufficient assets yet, but earns a few hundred thousand dollars a year, is accumulating assets quickly, and may need significant income tax planning support in the meantime. Yet the statistics show that the average American doesn’t even have $100,000 in investment assets, and nearly half of Americans don’t pay income taxes at all. The response from planners is that it’s just too difficult to serve clients at those lower wealth and income levels; the business model “doesn’t work” and isn’t viable/profitable.

But perhaps the real reason is not that the business model is impossible to design, but simply because the value of financial planning hasn’t been clearly defined to the public at large, and the financial services industry has brought so much distrust on itself, that as a result there’s no real demand for planning in the first place. If there was clear demand from consumers, is it really so impossible to build a business model that serves the masses? What does it take?

Let’s imagine we’re going to start a financial planning firm to serve the masses. We’re going to charge a very “accessible” price of $100/hour (which, notably, is actually lower than what many hourly planners currently charge under the Garrett Planning Network hourly model). We’ll assume the average meeting lasts for 1.5 hours; clients pay $150 for a “financial planning checkup” when they need it. We’ll assume a planner can see 4 clients per day on this model (which takes 6 hours of planning time), with the remaining time in the day for office work, catch-up details, etc. This means the planning firm collects $600/day in planning fees, which is $3,000/week, and $150,000/year of gross revenue assuming a 50-week work year.

Of course, we have to pay some expenses. We’ll pay the planner $60,000/year, which would be a fine starting salary in most areas for a newly minted CFP practitioner who has no responsibilities besides seeing a series of clients day after day to advise them on their needs. In addition, we’ll need to pay the cost for some basic office space in which to meet the clients, and some software and supplies; let’s generously assume that all of these other expenses, including some part-time administrative help, cost the firm another $40,000. This means at the end of the year, the firm generated $150,000 of revenue, and $50,000 of profits, for a nice and healthy 33% profit margin. And frankly, many firms could probably run a lean office on less than $40,000 of expenses by keeping office rent and other costs reasonable (which would be even easier to do if there were several planners running this model under one roof with shared expenses).

So what’s the problem? Here’s a business model with a healthy 33% profit margin, a job that a new planner would love to be hired for, and financial planning services for the masses at a remarkably affordable $100/hour.

The problem – the catch – is that in order for this model to be effective, the firm needs to meet with a lot of clients. If the planner sees 4 clients per day, that’s 20 per week, and 1,000 clients per year. In a world where many financial planners consider it a “great” year if they take on half a dozen to a dozen new clients, and reach capacity at somewhere around 100-150 client relationships, the idea of bringing in 1,000 clients per year is daunting, to say the least!

But what this means is that the challenge to serving the masses effectively is not a business model problem, per se. It’s a marketing problem. Or more directly, it’s a problem with the public’s perception of the value of financial planning, such that people don’t seek out and demand financial planning services; instead, financial planning must be sold. We have to convince each prospective client, one by one, that financial planning has benefits worth paying for, that it has value, and that the client should do business with the planner. In other words, the problem is not the lack of a business model to serve the masses effectively; the problem is a marketing model to convey the value of financial planning to the masses effectively.

Of course, one solution is for the firm to step up on marketing, and use some of the aforementioned 33% profit margin to implement marketing to a large number of prospective clients. In practice, though, it is difficult or nearly impossible for a single small firm to deliver on this (although an effective financial planner inbound marketing strategy might get there eventually). Thus, once again, the challenge re-emerges that the problem is not a business model to serve the masses, but that a business which serves the masses doesn’t have the scale to market to the masses.

That’s where larger organizations come in. Whether it’s the CFP Board’s public awareness campaign itself, or the work that Sheryl Garrett does in promoting the value of financial planning to the public at large, the opportunity for such organizations is to build public awareness for the masses; to convey the value of financial planning, with scale, to a broad base of Americans, so that planning firms can be implemented to serve the masses because they will have to spend less time marketing, so they can spend more time actually serving clients. In fact, even some private firms – like the upstart mass market financial planning firm LearnVest – are starting to get in on the action.

But the bottom line is that when we talk about the challenge of delivering financial planning to the general public, let’s stop talking about the business model problem, and start talking about the marketing and public perception problem. Because if everyone out there really believed that getting a financial check-up to get their lives on track was worth spending $150/year, and therefore demanded the services of a financial planner en masse, the rest would be… well, easy.

Michael Kitces is the Director of Research for Pinnacle Advisory Group, and publisher of the financial planning industry blog Nerd’s Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+. A version of this article originally appeared on Nerd’s Eye View on April 18, 2011.


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