Viewing Monthly Financial Planning Arrangements Through a Regulatory Lens

As the financial services industry continues to evolve, fee structures are becoming increasingly creative and innovative.

From monthly fixed fee financial planning models to net worth and income calculations, advisors are constantly seeking ways to make their fees more cost effective for clients while ensuring they are able to build a sustainable business model.

The difficulty here lies in the fact that most regulatory agencies have become complacent with their understanding of traditional assets under management structures and are therefore unwilling to even entertain the idea of these new fee structures.

At the core of this unwillingness to evolve and embrace change is the burden regulators face of finding new ways to administer regulatory exams—if they can’t audit it, they don’t like it.

This creates a unique challenge for advisors who want to provide financial planning services either independent of or in conjunction with asset management services.

Sure, spending a bit of time trying to understand the services that are being provided and how those services correspond to the fees being charged would go a long way towards addressing this issue. On the surface, this doesn’t seem like too much for advisors to ask of regulators.

However, the reluctance of regulators to devote time and resources to this initiative means that advisors should prepare to have conversations with regulators in defense of their fixed fee models.

In Advance or In Arrears?

Some regulatory offices are shifting focus to the timing of payments made for financial planning services. Regulators may take issue with instances in which an advisor charges in advance for a monthly service but does not provide any deliverables or execute any tasks related to that service during the month.

When the payment is received at the beginning of the month, the client does not have the option to “opt-out” of paying the fee should they determine that the value of the service was not properly established for the month. When this is voiced as a regulatory objection, the first line of defense is to consider switching from fees received in advance to fees received in arrears.

The conversation point for regulators will emphasize how the practice of charging in arrears empowers consumers to be able to determine if they deem the service sufficient for payment before the payment occurs.

Additionally, advisors can choose payment processors that give consumers flexibility with the timing and frequency of payments for financial planning services.

To Refund or Not to Refund?

In an effort to stay away from hourly financial planning as a primary business model, many financial advisors prefer to charge fixed fees. The question of whether or not a refund will be due to the client in months or quarters for which there is no change to the financial plan creates another regulatory hurdle.

For example, perhaps an advisor does three months of financial planning “work” in the first month of onboarding and does not touch the financial plan in the subsequent two months. Some regulators feel the client should be refunded for the subsequent two months for which there was no activity.

But how much should the refund be? This figure is nearly impossible to approximate without some hourly basis leveraged for numerical calculation.

To combat this issue, advisors can spend some time creating approximate hourly estimates for each financial planning activity. The key word is approximate.

Because no two clients are identical, a hard and fast hourly figure is difficult to nail down. Regulators who present this objection seem more comfortable with a minor variation in hours spent than they do with financial advisors charging during inactive months.

With a decent hourly estimate, advisors can prepare a policy for processing refunds should a regulator make this request.

Transparency of Services

It is not uncommon for regulators to focus on whether or not a financial advisor's services are transparent. This transparency is often evaluated based on a review of invoices.

All advisors are familiar with the process of maintaining client notes via CRM, but often advisors do not feel the need to include details of services provided on invoices. For traditional assets under management engagements, this is not a requirement.

However, for financial planning services, it is a good idea for planners to include a high-level itemized list of services provided on each invoice. Doing so can help address the concern regulators raise about clients being billed with no work provided.

This has been referred to as the “gym membership” analogy. Clients sign contracts for monthly billing regardless of how much or how little they use the gym. The gym actually stands to make the most profit if a client rarely (or never!) goes to the gym and uses the equipment because it reduces wear and tear on the equipment, and the gym receives the same payment. 

Regulators seek to ensure firms are not operating according to this model. By including details of the financial planning process on invoices, the advisor can protect themselves from regulatory claims of lack of transparency.

As the financial services industry changes and continues to evolve, financial planning will continue to be a catalyst for the expansion of financial services provided to clients. This evolution and expansion of financial services has forced regulators to re-evaluate the way they supervise and administer exams for firms.

Often, there is a disconnect between the regulatory office’s licensing and examinations divisions. Unfortunately, this means regulators may approve the use of fixed fees for financial planning on the front end and then turn around and voice concerns about the administration of the services and fees some time later during a regulatory exam.

By preemptively addressing the areas of focus outlined above, financial advisors can be prepared for regulatory pushback on fixed fee financial planning arrangements.

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.