Derek Tuz finds that he just can’t get clients very engaged in comprehensive financial planning unless they pay for it with an additional fee.
The owner of Aegis Financial Partners in Boulder, Colorado, said clients who simply pay for a percentage of the assets they have under management in return for advice feel little motivation to work with financial advisors on anything beyond basic investment management.
“They won’t send over their tax returns, they won’t send over estate documents and they won’t sit down to do what it requires to do a real financial plan,” Tuz said. “So the plan ends up being what I call financial-planning light. You do some things, and you ballpark some figures. But you don’t get into the depth that a real plan should go into.”
Tuz’s firm is one among many that have gone beyond the basic assets-under-management business model in wealth management and are charging separate fees for comprehensive financial plans. Aegis Capital offers various types of financial planning and adjusts its charges according to the complexity of a client’s needs, Tuz said.
Only 22% charging separate fees
Yet, Tuz’s approach to charging for services is far from universal in the wealth management industry. A recent report from the research firm Cerulli Associates and the independent broker-dealer Osaic (which Tuz’s firm is affiliated with) found that only 22% of wealth managers charge separately for financial planning services. The report, called “Financial Planning: Fueling Client and Business Growth,” was compiled in part from data from surveys of 2,000-plus advisors Cerulli conducts throughout the year.
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Tuz, whose firm manages roughly $150 million, said he sees himself as someone who goes beyond stocks and bonds for investors’ portfolios. His real “value add,” as he puts it, is in helping clients find insurance coverage, devise estate plans and find ways to lower their tax burdens. And the best way to prompt clients to take an active interest in these complicated matters is to make sure they have a little skin in the game.
“It’s behavioral,” Tuz said. “You get what you pay for. We want the client engaged in the process, and the best way to ensure engagement is to have them write a check for financial planning.”
The trend toward flat fees
There has been a steady push in the industry for the adoption of more fee-for-service business models. Edward Jones became the latest big name to move in that direction with its announcement in September that it would be offering comprehensive financial plans to clients with $250,000 or more for a flat cost of $3,600.
Chris Diodato, the founder and chief operating officer of WELLth Financial Planning in Palm Beach Gardens, Florida, eschews AUM fees and instead charges flat rates for both investment management and financial planning. Having WELLth tend to a portfolio for a year costs $750, while a comprehensive plan can range from $1,750 to $2,250, depending on household size.
Diodato said one flaw in the AUM model is that it gives advisors little incentive to go beyond amassing assets so their fees will grow. The result for some wealth managers is that financial planning becomes an afterthought.
“I’ve seen financial plans that are just a spreadsheet,” Diodato said. “It’s incredibly skinnied-down, or it’s just an online calculator, or they did their own personal capital analysis. And that’s not a financial plan.”
More than one fee model for firms to follow
But not everyone is convinced this is the way to go. Brett Bernstein, the co-founder and CEO of the Bethesda, Maryland-based advisor XML Financial Group, said his firm has always viewed financial planning as a central service paid for with AUM fees.
Bernstein said the trouble with charging for a comprehensive financial plan is that many times clients don’t need something quite so thorough. Many times they’ll have a question simply related to retirement or taxes.
“So charging extra for it is a slippery slope,” Bernstein said. “Because if someone comes to you and just has a question on retirement, but they don’t want to talk about life insurance or disability or long-term care or estate planning, are you going to charge them less?”
Advisors who charge thousands of dollars for a plan will often feel a need to be comprehensive, even if that’s not what a client necessarily wants.
“And then when I don’t deliver it because you, the client, don’t care about education, insurance, planning and these other things, then I basically do less work and am charging the same money,” Bernstein said.
Faiza Kedir, the managing director and wealth manager at Sunshine Private Wealth at New York-based Steward Partners, likewise doesn’t charge additional fees for the financial planning that she sees as central to her firm’s offerings. Kedir said she has been in the wealth management business for more than 25 years and has always charged simple AUM fees.
That said, she has never viewed her job as stopping at investment management. For one, it’s almost impossible to understand a client’s investment needs and goals without having a broad comprehension of their financial situation.
“When I sit with a prospect, I lead with financial planning, and that gives me a picture of what I can do for the client,” Kedir said. “Then my proposal is: After this financial planning and based on what you are trying to achieve, this is what I can do to help you.”
Tricia Rosen, the founder of Access Financial Planning in Newburyport, Massachusetts, said she allows clients to pay for advice both through AUM fees and flat fees. But she doesn’t make a distinction between simple investment management and financial planning.
“All clients receive comprehensive financial planning, which includes both services,” Rosen said. “The financial planning work informs the investment management work. The two services are integrated, and I wouldn’t be able to do the work I do if I separated them into two different service offerings.”
What advisors get with financial planning
However these advisors differ in charging for financial planning, most agreed that firms that stop at simple wealth management are leaving a lot on the table.
“Advisors who are focused only on gathering assets without doing a financial plan, they are missing an opportunity,” Kedir said. “By doing a financial plan, you learn about clients, where everything is, and how you can help them. And if I don’t know the whole picture, how could I advise them on just a piece that might affect their life significantly?”
Indeed, Cerulli and Osaic’s research found that 53% of retail investors say it’s important to have a written financial plan drawn up with the help of an advisor. That’s up from 41% a decade ago, according to the report.
Yet, Cerulli and Osaic noted that less than one-third of advisors offer comprehensive planning services. Most wealth managers, 57%, fall into the category of what Cerulli calls “case-based planners.” This means they view their primary responsibility as investment management but will provide additional services when they think there’s a need.
Bernstein said one of the impediments to offering comprehensive planning is simply cost. He said XML Financial Securities pays substantial sums every year so its advisors can use financial planning products from the software firm eMoney.
His firm also has employees on staff charged specifically with financial planning, he said. Those additional hires may be something smaller practices can’t easily afford.
But even more than costs, there is the basic question of what advisors were setting out to do when they entered the wealth management business, Bernstein said. Some really do just want to be experts at portfolio management.
And as long as they’re upfront with clients, there’s nothing necessarily wrong with that preference, Bernstein said.
“What was the firm founded on?” he said. “Because there are places that just do planning and don’t manage money. And then there are places that manage money and also do planning.”
Time also a barrier
Patrick Kilbane, a partner and general counsel at Ullmann Wealth Partners in Jacksonville Beach, Florida, said the time needed for comprehensive planning can be an impediment. Ullmann, which works primarily with wealthy families and individuals, often dives into the “nitty gritty” of charitable giving, estate planning, insurance and retirement-related questions such as what’s the best age to start taking Social Security payments.
Kilbane, a lawyer by training, said he has helped clients find outside counsel for everything from getting a divorce, to helping a child break a dormitory contract, to finding relief under a state’s “lemon law” for sales of defective automobiles.
Not all firms have the time or resources to go that far, Kilbane said. The difference is almost like the choice between a suit bought off the rack and one that’s tailored.
“If you buy a tailored suit, it’s going to take three weeks to a month to get your suit,” Kilbane said. “Well, why does that take so long? Because they do — what? — 30 to 50 measurements to make a suit that is going to fit you like a glove.”
But with client demand for comprehensive planning growing, Cerulli and Osaic think the number of advisors heeding the call will only grow. Joe Gaeckle, the head of the National Planning Institute at Osaic, said firms also have their own financial incentive to offer more services: It often gives them a means of bringing more assets under management.
“So what you get is two positive outcomes, one for the client, the retail investor, who gets more confidence and clarity on the financial picture,” he said. “And then, for the advisor, it’s deeper client relationships, more referrals and larger AUM.”
