The RIA Business Model You Need to Serve Next Generation Clients

It’s time to address something all financial advisors know to be true, but most don’t usually admit. The financial planning industry is slow to change and slow to adopt new practices, new technology, and new marketing techniques.

It doesn't matter if you look at investment management, insurance sales, or true financial planning. In any view, it’s easy to see that we’re stuck in old ways of doing things simply because that’s the way it’s always been done. One only has to look to other industries to see just how far behind we are.

There are many reasons why we're stuck. We haven’t needed to change, since our businesses are profitable. We haven’t seen the technological innovations that many other industries have experienced, because advisors typically don't purchase new tech. Neither businesses nor individuals invest much in technology designed for running financial planning practices.

Not to mention, ours is a highly regulated industry. That regulation and strict requirements to stick to existing standards tends to slow technology innovation from the get go. It certainly slows individual advisors and firm owners from taking risks by adopting that new technology, too -- especially if there are any regulatory gray areas that the industry hasn’t yet resolved.

Additionally, we have an aging generation of advisors. While this older group of of advisors created what financial planning is today, they’re still operating the same way they ran businesses and served clients a decade or so ago. And little wonder: technically, it’s been working.These advisors and their firms have been making money, so why push change? Why push for progress when the same old thing seems to keep bringing money in the door?

These advisors and their firms have been making money, so why push change? Why push for progress when the same old thing seems to keep bringing money in the door?

But we’re starting to see many things happening at once in the financial planning industry. The landscape is changing, whether individual advisors and their practices are okay with it or not. The profession as a whole is evolving from where the industry began.

Next Generation Clients Want Advice, Not Products, from Advisors

When financial planning began as a profession as discussed earlier, advisors were product salespeople. We were insurance agents or stock brokers. And we did some financial planning because it was a good way to demonstrate the need for the products that we had to sell, but sales remained our focus.

Young people today increasingly are looking for financial advisors. They take the title literally and actually expect advice. They’re looking for help planning their financial lives.

Products are something that they can buy online themselves, but advice is something Gen X and Gen Y clients seek out from a human being they can have a conversation with; a website can give us information, but it can’t tell us how to apply it to our lives.

Next-generation clients are often savvier in general because of their comfort level with technology and their native knowledge on how to find the information they want. We’re starting to see clients come to us who know how advisors charge and how much money financial planners make.

They know the difference between commission and fee-only. They’re more educated and can ask more probing questions about fiduciary standards and whether or not you’ll work for them under that standard. Of course, not all clients are this well educated.

But the information is out there and available, and distinctions in the industry are no longer reserved as insider information as they once might have been.

Gen X and Gen Y clients are also looking for a specific kind of advisor. They know they’re looking for financial planning and comprehensive financial advice, not just insurance sales. Younger clients are looking for advisors who speak their language and understand their life stage. They want specialists to serve their specific interests, needs, and goals.

The Power of Niche Marketing Your Services

Let’s consider the craft beer industry as an analogy to better understand these ideas.

Consider how big, corporate players used to dominate. There was no room on the shelves for small-time operations between products from Budweiser, Coors, and Miller. But in recent years, there’s been a huge demand -- especially among Gen X and Gen Y demographics -- for what’s known as craft beer.

Younger generations tend to prefer locally made, locally sourced, specialty beers, and shun products from bigger, national companies that are generic, plain, and mass produced. Today’s consumers want unique and different offerings from the beer industry, and they’re interested in very specific kinds of tastes and flavors.

This move away from big, broad, and general products with a corporate feel and toward smaller, niched-down, and personal is happening in financial planning as well. It’s driven by the desires of the same consumer segment who want to feel like the companies they work with and give their money to actually care about their experiences and needs.

They don’t want faceless corporations or to feel distant from their service providers.

Consider, from a sales perspective, what happens if we create a specialty beer (or a specialty service) that has a really unique profile that only appeals to a really small subset of people -- but the people that it does appeal to are raving fans because it’s perfect for them.

This is what’s possible right now. You can develop a niche and reach a specific group of people that don’t need to be sold on your offering, because they’re naturally attracted to it and they know it’s what they want.

The RIA Business Model That Allows You to (Profitably) Serve Gen X & Y

Creating a service model to serve Gen X and Gen Y clients requires rethinking and completely restructuring the way your firm generates revenue.

Instead of looking at existing business structures and trying to make it fit for the next generation, go back and ask this question: “If we were building this from the ground up, how would we design a fee structure to work with Gen X and Gen Y clients?”

Assets under management or AUM is simply not an option if you want to serve this demographic profitably. We can do the math to see that, ultimately, you can’t generate revenue on an AUM basis if you’re working with clients that don’t have assets. Most next-generation clients don’t have assets -- and if they do, those assets are usually tied up in 401(k)s or equity in their homes.

Even if someone in their 20s, 30s, or 40s has a net worth that makes them look like a viable client, they may not have enough liquid assets in an investable account for you as the advisor to manage and deduct 1% of fees to run a profitable business.

And you should get paid to serve these clients. No one is asking advisors to work pro-bono. We don’t run charities. It’s not sustainable to try and build a business around serving “poor” clients today in the hopes they’ll be “rich” someday in the future.

It is perfectly fine to charge for the services that you’re rendering and get paid to do that work. But that means you must find a model that balances both sides of the equation: you can serve Gen X and Gen Y in a way that is affordable to them, and in a way that’s profitable for you.

Why the Monthly Retainer Model Works for Next Generation Clients

Charging assets under management worked for clients with assets to manage. It made sense and worked well for all parties. But this model fails with next generation clients who have the income to pay for advice, but not the assets on which the advisor can charge a commission on.

When advisors say, "I can't work with younger clients because they don't have any assets to manage and therefore they aren’t profitable to my firm," what they're actually expressing is that the existing service model and fee structure designed for different types of clients with assets does not work for clients without assets.

And we agree! We can all do the math to understand that as a business owner, you can't profitably run your firm by serving clients that have an average of $50,000 in an IRA when you charge 1% AUM.

But this isn’t a client problem. It’s a business model problem. If we could be free from the expectations and the history -- and the “way things have always been done” mindset -- we could then openly ask questions like:

How can we build a fee structure to serve younger clients? How does that fee structure function so clients can afford the services and advisors can make a profit?

We asked these questions and landed on the monthly retainer model as the answer. No, this isn’t the way it's always been done. No, business has not normally been done this way. But the monthly retainer model works both for next generation clients and for the advisors who want to serve them while still running a business that can generate revenue.

You can get the full guide to implementing a monthly retainer model into your RIA to profitably serve the next generation of clients. The Monthly Retainer Model in Financial Planning is now available on Amazon!