Common Regulatory Obstacles When Using the Monthly Subscription Model

The monthly subscription model, while relatively new to the financial planning world, holds great promise for financial advisors and consumers alike. With the changing financial landscape across the country, more and more financial consumers will be in need of financial planning services, but perhaps without significant assets to manage.

As a vast majority of regulatory statutes are centered on assets under management (AUM) practices, so much of the onus is on financial planners to create interpretations of those regulations that fit into the scheme of a financial planning centered practice.

However, with this process comes a host of regulatory concerns. Below is a compilation of the most challenging regulatory obstacles advisors may face when implementing the monthly subscription model for financial planning.

Your Engagement Cannot Resemble a Gym Membership

Perhaps the greatest regulatory concern facing financial advisors who participate in a monthly subscription-based financial planning service is the notion that advisors don’t actually earn their monthly fees.

In the past, regulators have brought up the “gym membership” analogy, stating that advisors may potentially be charging clients on a monthly basis for services that are not being utilized.

This idea corresponds to a more traditional compliance concept known as “reverse churning,” which describes instances in which an advisor places a client in a fee-based account for no reason other than to collect the fee, providing minimal investment advice and executing insufficient levels of portfolio turnover.

To combat this objection, financial planners are advised to create a structured financial planning process for which the actual activities that are completed on a monthly basis can be outlined, executed and verified by regulators.

The Language Barrier

Another obstacle to note is the insertion of new language and terminology into the regulatory conversation.

Traditionally in compliance, the word “subscription” refers to the process by which the client accepts an ongoing newsletter or periodical in exchange for payment.

Therefore, when regulators see this term, they often immediately revert to this more traditional definition, which has nothing to do with the financial planning process.

This financial planning model also may be referred to as the “monthly retainer model.” The word “retainer,” in the traditional sense, refers to the practice of a client maintaining ongoing access to a professional, without regard for services that may or may not actually be provided.

For instance, someone may pay to keep an attorney “on retainer” without actually utilizing legal services. For regulators, this is an unacceptable practice from an advisory perspective.

Charging Multiple Fees

It is important to maintain focus on the AUM baseline rationale for regulatory statutes. Many advisors will still utilize a traditional tiered or blended fee structure to accommodate traditional AUM practices while attempting to add a more comprehensive financial planning structure to their firm practices.

Regulators love AUM, because it makes sense to them. However, what doesn’t make sense to many regulators is why an advisor would charge a client both for AUM and monthly financial planning simultaneously.

At the root of this issue is the fact that many compliance examiners do not yet recognize financial planning as its own separate and distinct process.

So, it is not uncommon for financial planners to hear statements such as, “A good financial advisor who is charging for assets under management should already be covering the client’s financial planning needs as a part of that same engagement.”

While a true financial planner may find this offensive and short-sighted, the burden is on the advisor to show the distinction between what elements of financial planning would be included in a traditional AUM relationship, and what additional value is provided by a comprehensive and ongoing financial planning engagement.

Even in doing so, some regulators will not allow advisors to charge for assets under management and comprehensive financial planning simultaneously.

Maintaining Separate Agreements

Most advisors choose to have separate client agreements to facilitate AUM and financial planning services. This is advisable from a compliance standpoint because it allows for client transparency, as well as a more organized approach to preparing for an audit or examination.

The bottom line objection that most regulators have to the monthly subscription model is client protection. They want to be able to pinpoint exactly what services the client is paying for, and verify that those services are actually being provided and are valuable to the client.

If a client is to be charged separately for AUM and financial planning, having them sign a separate agreement more adequately displays their understanding of this arrangement.

In addition, the regulator can benefit from a more thorough explanation of services being provided if the financial planning agreement elaborates on those services and is not impeded by a combination of that explanation with the AUM description on the same document.

The Inability to Audit

Regulators love consistency. Just as with any other professional position, policies and procedures are most effectively executed with a consistent set of repeatable practices that can be applied to multiple situations.

That being said, it is preferable for regulators that they are able to easily calculate fees to determine if they are fair and reasonable.

This is completed through the age-old practice of taking the account value as of a particular date, multiplying by the number of basis points assigned to that value, and dividing by four to receive a static number representing the client’s quarterly fee.

Then, the regulator can simply check the advisor’s financial records to make sure this amount matches both the deposit to the firm’s account and the invoice that the client received. Done!

With monthly financial planning however, the fees may appear to regulators to be ambiguous and arbitrary numbers that the advisor simply decides at the point of implementing the model. Regulators generally use a 3% rule; that is, the total fee as a % of client AUM may not exceed 3%.

Again, simple to calculate and easy to verify.

With financial planning, how can the regulator assign a value to the services that are being provided if some advisors charge $100 per month while others charge $500 per month? Should the regulator consider the cost of living in the state in which the advisor operates?

For AUM relationships, regulators can look towards SEC regulatory guidelines, but there is no “version” of the SEC for financial planning. This is the most pressing and difficult obstacle to overcome when implementing a monthly subscription financial planning service. Regulators do not like what they do not know how to audit.

With a growing wealth gap throughout the country, there will be an increase in the number of middle-class Americans in need of financial assistance who do not have significant assets to manage.

Student loan debt is ballooning in a way that prevents young professionals from accumulating liquid wealth in a manner that was more possible decades ago.

Increasing childcare costs are placing a burden on middle-class families that require financial planning in instances where the liquidity of the household is being depleted by day care costs.

For these reasons, financial advisors may be wise to get ahead of the game and add a monthly subscription financial planning model to their suite of services. In doing so, they should also be prepared for these common regulatory obstacles.

The entire industry will be forced to come around to this line of thinking; it’s simply a matter of time.

About the Author

Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.

Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.

Scott lives in Charlotte, NC with his wife Meredith, and their two sons Tyson and Jackson and daughter Eva. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.

You can connect with him on LinkedIn.