why they beat aum and hourly fees for wealth management.
by rory henry
the holistic guide to wealth management
recently i listened to a lively debate about financial advisor compensation between ramit sethi, author of the best seller “i will teach you to be rich,” and michael kitces, host of the financial advisor success podcast. sethi was highly critical of the traditional 1 percent of assets under management (aum) model that so many wealth advisors charge. instead of 1 percent of aum, sethi argued that advisors should think of themselves as accountability partners (i.e., personal trainers for clients’ money) and instead charge them based on how they help them modify their behaviors to produce better outcomes.
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for instance, a good advisor can help clients adopt good behaviors such as saving more of every paycheck and sticking to their investment plan during volatile times. good advisors, said sethi, also help clients from engaging in their old wealth-destructive behaviors such as speculating on hot stocks in the news or cashing out of the market at the first sign of trouble. by the way, helping clients modify behaviors and produce better outcomes is what an advis-ror™ does.
let’s explore how an aum/subscription model using a virtual family office is a win for both firms and the clients they serve.
as sethi said on kitces’ podcast, if you’re an advisor charging 1 percent, you have a problem because 1 percent “does not stand up logically to any scrutiny.” he challenged listeners to imagine that they’re 30 years old and choose to invest $50,000 and make contributions of $1,000 per month. “in 35 years, with a low 0.2 percent management fee and assuming a 7 percent return, you’d have just over $2 million” he explained.
but if you pay a financial advisor 1 percent, sethi continued, you’d only have $1.7 million. “that’s more than $380,000 going into your advisor’s pockets in fees!” exclaimed sethi. “this is what i mean when i say that a 1 percent fee can cost you 28 percent of your lifetime returns.”
sethi said advisors should instead charge an hourly rate to manage client’s portfolios on an as-needed basis. he tells investors to expect to pay $200 to $300 an hour, but he said even $500 an hour is worth it if you find someone you really like and trust. “don’t even bargain if you find an advisor that you like and trust.”
kitces, head of planning strategy for buckingham strategic wealth, argued that the aum model still had merit, and that it didn’t need to be as high as 1 percent for clients with larger investable assets. the key, said kitces, is for the advisor to have some skin in the game – they earn relatively more as the portfolio grows, but earn less if the portfolio shrinks. with an hourly model, the meter is always running – like it is with attorneys and some cpas – and there’s no downside for the advisor when they underperform. he also thinks 1 percent or say, 0.7 percent for clients with eight-figure assets, is a bargain when you consider the complexity in their lives, especially if they’re business owners. “i know advisors doing 40-, 50-hour financial planning projects for certain business owners and other successful individuals. if they charged hourly rates for that planning,” clients would be paying much more than 70 to 100 basis points a year.
if you are a cpa, you’re probably cringing when you hear sethi talk about moving to an hourly billing model. as kitces points out, the hourly vs. aum argument is basically a wash. personally, i believe advisors and clients must ask themselves whether they would rather live in a time-based and transactional (i.e., hourly) world, or one that’s built on trust and alignment (aum). the latter is based on the belief that value will be provided to the client and that the client will respect the expertise and time of the advisor.
sethi said most people don’t understand the math of how 1 percent leads to 28 percent in fees being paid out. ”when i show people the math, it absolutely blows their mind,” said sethi. “it’s no accident that 1 percent of aum has been engineered to be confusing for the average consumer. what would you want your mom or dad to pay their advisor?”
enter the concierge model
kitces countered that his parents do pay an advisor 1 percent. “for them, it is an ongoing relationship,” explained kitces. “my folks are retired and moving on to later years. re-explaining their financial situation to a new advisor every year isn’t going to work in the long run. in fact, in some number of years, i don’t even know how strong they’ll be to make a lot of their own financial decisions. and so, they can’t get a new financial advisor up to speed in meeting every year; the value for them is they have an ongoing relationship with someone who understands their whole situation and can deal with all of that on an ongoing basis.”
as kitces added, when people have a lot of health issues, there comes a point at which they don’t just want to just go see a doctor every time they have a complex health issue. they just want a dedicated doctor who knows their whole situation so they don’t have to keep explaining the whole chart over and over again. there’s a whole concierge medicine domain that’s growing in the same area. shortly, ron baker will share what accountants and wealth advisors can learn from the concierge medicine model.
sethi admits he’s come down hard on aum advisors but doesn’t believe it’s fair the way that consumers value financial advice. “it’s totally backwards. they basically want to beat the market. and so, they pay for gimmicks and tricks and investment advice, which in the majority of cases, would be better to just put in a target date fund or an index fund, etc. but they don’t pay for behavioral interventions, for checkups, for accountability. those are the things that actually really matter. and for things like, ‘hey, let’s look quarterly over your spending, let’s increase your savings rate by 1 percent a year.’ that is incredibly meaningful, but they won’t pay for that,” said sethi. and as i’ve argued, this is exactly the kind of advice an advis-ror provides as part of an ongoing relationship.
kitces disagreed with sethi about what clients value most. he believes clients will pay aum advisors for behavioral interventions, checkups and accountability when it’s bundled into an aum fee. “there’s a huge range of what advisors are doing for their 1 percent and the market is excruciatingly slow to sort that out,” asserted kitces. but if you add up all the aum fees and divide by the average number of hours put in, his research shows it tends to average at $250 to $300 an hour, which is what sethi and other experts say is a good starting point to pay advisors if you prefer the hourly billing model.
kitces stressed the importance of check-in meetings, ongoing meetings around retirement issues, spending reviews and cash flow issues, tax planning issues, fixing estate documents and fixing insurance problems “not because they’re selling insurance but because they are advising on it and can see problems. it’s all those domains that broadly we call financial planning that you end up with if you decompartmentalize the fee.” according to kitces, only 25 percent to 50 percent of the aum advisor’s work with a client is investment-based. the rest is financial planning and behavior management.
so, you’re probably wondering where i stand on the aum vs. hourly fee debate.
as a card-carrying advis-ror i naturally tilt toward the aum model. that’s because advis-rors provide so many other services to clients beyond investment management – tax planning, financial planning, cash flow planning, estate planning, insurance, business succession planning and retirement planning, to name a few. clients like the convenience of a fixed quarterly “bill” (recurring fee in industry parlance) that gets automatically deducted from their portfolio for having a comprehensive virtual family office at their disposal.
it would be difficult to provide a virtual family office level of service to clients on an hourly basis. the bill would be way too high for so many ongoing services, even at $100 or $200 an hour, let alone $500 per hour. again, holistic advice is an ongoing relationship; it’s not transactional.
from where i sit, forward-looking cpas who adopt the holistic approach and integrated client service model are going above and beyond. they are looking at the totality of their client’s financial picture because they not only advise the client about their businesses, but also about their personal finances and often they’re advising families across several generations.
highly sought doctors understand the value of serving fewer patients – being able to spend more time with each patient and getting to know them better. patients are increasingly moving to concierge medical practices because it’s a much better overall experience for them (and for their physicians). this approach transforms medicine from a reactive profession (“i’ll treat you when you’re sick”) to a proactive profession (“come see me regularly so we can keep you healthy”) as physicians can now offer guidance and education to patients before they get sick about such things as health, nutrition and wellness. with this “preventative maintenance” approach, they are doing extensive diagnostic work proactively to ensure their patients have a clean bill of health.
more recently, we are seeing leading financial advisors take a similar concierge approach to wealth. whether they’re finding proactive ways to help businesses keep growing or using behavioral finance principles to help clients save and invest their money, setting up buy-sell agreements to exit their businesses, or working with families on intergenerational wealth planning, they’re taking a holistic, advisory approach to serving clients rather than simply a transactional one (“i’ll help you with investments, here’s my bill).
when you have the bandwidth and proper compensation in place, the stage is set for you to use your expertise and professional network to help clients solve a wide range of challenges for clients. this in turn helps them optimize their finances and well-being.
going back to the fitness trainer analogy, pam krueger wrote in kiplinger personal finance recently that people don’t pay their personal trainer more as they grow stronger. so, does it make sense to pay your financial adviser more as your investments grow?
as krueger explained, paying based on a percentage of aum is simple and the majority of individual investors (60%) say “clear and understandable” fees rank as the highest priority when choosing financial institutions to work with, according to a recent poll by the research firm hearts & wallets. that answer was even more important than “explains things in understandable terms” (56%), “puts my interests first” (54%) and “has made me money” (52%), researchers found.
krueger pointed to three potential conflicts in aum pricing if you decide to go that route:
- clients could end up paying an advisor more because their assets grew primarily because of the rising stock market rather than from shrewd investment decisions made by the advisor. a 1 percent aum fee could seem like a lot if the portfolio was composed primarily of unmanaged index funds or exchange-traded funds.
- an advisor has an incentive to keep client assets invested when that cash could be better deployed to pay down an outstanding loan, pay off a mortgage, front load a college savings accounts for a grandchild or make a substantial tax-advantaged gift or investment in a family member’s business.
- advisors can only charge fees based on accounts they directly manage. one type of account an adviser can’t directly manage is a company 401(k). that can create a conflict of interest when deciding whether to keep funds in your company 401(k) or transfer them to an individual retirement account. the incentive from the advisor’s standpoint would be to have you move your retirement savings to an ira. while such an ira rollover can often provide many benefits, there are some cases where it is in your best interest to let your savings stay put.
for too long, many important groups of people were being underserved or ignored by the financial planning industry, because it was assumed they didn’t have enough investible assets. this included younger adults just starting their careers, older adults getting their finances back on track and entrepreneurs who typically had most of their net worth tied up in their businesses.
but cpas serve those clients on a regular basis with tax, accounting and business advisory services. they know the personal goals (and income potential) of these types of clients intimately and are perfectly positioned to help them with behavioral coaching as a next-level service. this is how the financial flywheel that i’ve talked about starts to build momentum.
if you’d like to start advising clients about growing their investments and protecting their wealth and believe that the aum model is the best way for you to charge them, just make sure you know how to counter their concerns about fees and reiterate the value you provide.
the concierge, subscription and membership future
accounting professionals are understandably concerned about pricing their services properly. many have made the difficult transition from hourly billing to value billing and increasingly, forward-looking firms are moving to subscription pricing and the recurring revenue model. when you offer clients wealth management services under the aum model, that is a form of subscription pricing and recurring revenue. if nothing else, this model provides more consistent cash, easier billing and a better quality of life. down the road, subscription-based firms receive much higher valuation multiples than traditional firms.
even for your clients who don’t have enough investable assets (yet) to be managed under the aum model – typically $250,000 or more – they can still benefit from your financial planning expertise. you can’t just look at the fees being generated today; you must consider the lifetime value of that client under the integrated service model.
the real question is how to package and present this integrated offering to our clients. let’s look at how we can communicate this shift in pricing and value to our clients:
beancounter cpas & associates, llp is excited to announce the launch of beancounter wealth & family office. we have enhanced our services by adding holistic financial planning, wealth management and family office services availability to our clients. as your trusted advisors, we are now better positioned to address your comprehensive financial needs through a fully integrated offering.
for clients who are currently working with another advisor and prefer to maintain their existing plans, rest assured that there will be no changes to your accounts; we’d love to speak with your advisor to ensure we are working effectively to manage your account.
however, for those interested in exploring our integrated approach to personal financial planning and wealth advisory, we are thrilled to offer our new subscription services: wealth+ and family office+. these subscriptions are designed to provide a comprehensive 360-degree overview of both your business and personal financial planning and wealth management needs.
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- tax optimization
- investment management
- insurance planning
- estate planning
- retirement planning
- education planning
at beancounter, we not only handle the compliance needs of your business, but we will also file your tax return(s), provide ongoing advice for your business and handle (in partnership or in house) your personal financial planning needs, a one-stop shop to quarterback your financial life throughout your lifecycle.
this new pricing model provides clients with a frictionless offering, a membership-type buy-in, and when done well, will create advocates for your firm.
i wanted to provide an argument and road map for a subscription/recurring model. read on as industry pricing expert ron baker helps me address the following:
- why a subscription offering is the future
- how to plus your value proposition with a wealth/family office offering
- ways to execute a subscription offering
baker – founder of the verasage institute, co-host of the soul of enterprise radio show and author of “time’s up: the subscription business model for professional firms” – told me on my podcast that cpas are in a unique position to help clients from “womb to tomb,” i.e., college planning for a family’s newborn to estate planning for seniors. “cpas’ real value is guiding clients through impactful transformations in their lives,” lamented baker. “but instead, we focus on scope of work and billable hours and utilization rate. none of that matters to the client.”
when baker talks about transformation, he means helping them achieve breakthroughs in their financial and personal lives. most businesses are tied to a product or service and can’t guide customers through transformation, explained baker, but cpas are among the few that can. “starbucks can give me a comfortable place to go between my office and work, but they can’t transform me,” said baker. but cpas and other skilled financial professionals not only help clients achieve transformations but can do so again and again (aka “serial transformations”).
baker is fascinated by today’s subscription economy in which you can subscribe to almost anything, from streaming services and vacation homes, to boats, a fleet of porsches and grocery delivery services. and he argues a subscription-based accounting/financial advisory practice is the best way to deliver transformation for clients. for guidance, he pointed to concierge doctors and direct primary care (dpc) doctors who he believes are leading the professional pack when it comes to leveraging the subscription model. “they’re completely disrupting the way medical care is delivered in this country,” said baker, who was not surprised that amazon recently paid over $3 billion to acquire one medical, the largest dpc in the united states.
from a personal standpoint, my primary care provider went to the concierge model and i love it. as a cpa, you have intimate knowledge of a client’s finances just as a doctor has intimate knowledge of someone’s health. as kitces mentioned earlier in this chapter, people don’t want to up and leave someone who’ve they’ve shared intimate information with. same with their therapist.
baker related the story of howard maron, team doctor for the old nba seattle supersonics who once said that when a player was injured, he could run out on the court and instantly diagnose the injury and required treatment because he knew everything about that player. “i know what drugs they take; i know what they’re allergic to; i know their entire medical history. why can’t i do this in my general physician practice?” asked maron. the answer was because he had 2,400 patients. when you’re seeing 60 patients a day and spending on average five minutes per visit with them, you can’t know very much about them, explained maron. but that’s the fee-for-service business model we find ourselves in. so, he started md2, which has become the largest concierge medical practice in the u.s.
baker said that when he first explored the concierge medicine model in the early 2000s, he called it “retainer-based medicine.” but he learned over time, it’s not really based on a retainer. instead, he said patients are paying for on-demand access to their concierge doctor whenever they need it, wherever they need it. md2 does not allow its doctors to serve more than 50 families each.
“a professional is someone who is responsible for creating a result,” explained baker. “it’s not someone who is performing a series of tasks. whether we’re billing hourly in the accounting profession or doing value pricing, you’re primarily monetizing your services, your scope of work and the labor of your employees. clients don’t care about any of that,” cautioned baker. he said the three things people want from their professionals are to be healthy, wealthy and wise. “a professional is someone who is responsible for creating a result, not performing a series of tasks.”
just as doctors keep their patients physically healthy, accountants keep their clients financially healthy. “so, we need to get off this fee-for-service treadmill and start pricing the relationship with the client and give them peace of mind, convenience and service simplicity in our business model,” argued baker. “concierge doctors and dpc doctors are basically telling their patients: ‘whatever you need, you’re covered (as long as we have the ability to deliver it).’ that model is beautiful and gives us enormous pricing power as professionals.”
futurist and marketing guru seth godin likes to say, “if your customers talk about nothing but price it’s because you don’t give them anything else to talk about.” baker, a devoted godin fan, believes price is just a story. “apple doesn’t degrade its pricing integrity. you never see it go on sale,” observed baker. “the only time it lowers prices is when its newer technology is making the older models obsolete. price is just a number, but value is completely subjective. it’s not a number. it’s a feeling. i can buy a good dell computer for $700, but i’m happy to keep paying $3,500 for an apple because it’s intuitive, it’s easy, it understands me. so, i’m happy to pay five times more. it’s all about emotion and how the apple products make me feel,” shared baker.
so, i asked baker how an accounting firm can build a powerful brand and how it can incent clients to say proudly: “i’m a customer of xyz accounting & advisors and i’m happy to tell you why they’re so great.”
from customers to members
baker said it’s about making customers feel like members. because once they’re members, then they stop looking for alternatives. for instance, he said if you join a country club, you’re going to do 80 percent of your golfing on that course. you’re not going to be out looking for alternatives. and if you go to a big firm, he said you move from one silo to another. “they don’t bring the full resources of the firm together to bear on that one customer’s needs,” said baker. “and this is where i think the concierge doctors and the dpc docs do a really good job. they don’t have the expertise in-house, but they have it in their network. and they can refer you to a cardiologist or whatever you need and get you an appointment asap,” concluded baker.
i agree with baker on the merits of being the go-to source for your patients and customers. in the financial world we call that model a “virtual family office” in which you’re bringing in other subject matter experts to help your client solve a challenge, but as the trusted advisor, you are still quarterbacking that situation on behalf of the client. thanks to technology, we can provide a family office level of care to clients without them needing the wealth of the rockefellers and the vanderbilts to afford it.
baker told me he loves the family office model because it makes clients feel like they’re always in good hands. “we might not be able to solve your problem directly, but we’re your first stop,” he said. “you call us whenever you need something.” and baker said you can’t provide that kind of service if you’re handling hundreds and hundreds and hundreds of clients.
“i think it’s pretty safe to say that most accounting firms, like most medical offices, have too many customers,” lamented baker. “that’s why the burnout rate in both professions is so high. i’m telling firms not to run anywhere near 70 percent capacity. they should borrow a page from the concierge doctors and not serve more than 50 patients per physician,” explained baker. “that’s because they always want to have spare capacity for you to come in on an emergency basis. last thing you want to hear from your dentist when you have a serious toothache is: ‘oh, we can’t fit you in until next week.’”
baker shared the anecdote of trying to get an appointment with his eye surgeon, and that he had to wait five months to see him. “when i finally got in to see my doctor i said, ‘doc, if you don’t give me a subscription lane where i can cut in front of everybody and see you the next day or the same week, then you’ve become dispensable in my life.’” baker said the worst thing you can do to a patient or client is waste their time. when cpa firms send clients 200-page tax organizers, he said that’s a form of abuse. “they should already know everything that’s in that organizer – if they got married, had a kid or they moved, etc. they would know those things if they’ve been meeting with that client periodically throughout the year. but you can’t do that if you have 1,000 or 2,000 clients,” said baker. “again, i want to see firms run at no more than 50 percent to 60 percent of capacity. doctors who’ve moved to the concierge (subscription) model have a waiting list of patients and they’re really thriving because they have the time to provide great care and also have a good quality of life.”
building off what baker says, there are several ways to pivot your practice to include wealth management:
- spin out a new firm. now you have an accounting firm and a completely separate wealth advisory firm under one roof.
- partner with an ria and make part of your firm’s “plus offering” an integrated service that includes holistic wealth management for your clients. think disney plus. walt disney himself said, “if we don’t constantly delight customers and put new things in and don’t add new features that surprise them and delight them, they won’t come back. we need to plus our offering.”
- gradual pivot. baker said you can test the subscription model with a tranche of customers and see how they like it. the problem with the gradual approach, said baker, “is that it’s a weak test. you’re not fully committed. so, the first time you face a few challenges, other partners will be pointing fingers saying, ‘i told you it wouldn’t work.’”
when moving clients to a subscription model, the first thing they’ll want to know is: “what’s in it for me?” (wiifm). the chart below shows how accountants can add wealth management to plus their service offering.
real world example
let’s say you are working with a $2.5 million family-owned manufacturing business and it pays your firm $2,500 per month ($30,000 per year) for tax, accounting and business advisory services. so, you already have intimate knowledge of the owner’s primary source of wealth. why not add holistic financial planning and wealth management as your plus offering? here’s how it works:
first you would create a comprehensive financial plan for the owner and his family. because of the complexity of the owner’s situation, you could charge say $4,500 for the plan the first year and say $2,500 a year in the future to update it and maintain it. upon completion of the plan, the owner entrusts you with $3 million in investible assets to manage according to that plan.
because you have so much of the client’s data at your fingertips already from your tax and advisory work, you may decide to waive the fee and simply include it as part of your 1 percent aum fee on $3 million (i.e., $30,000 per year or $7,500 per quarter).
so, in year 1 of the new relationship with this client, you are earning $60,000 to $64,500 (see chart below). that’s more than twice as much as you were earning before for tax and business advisory.
‘subscription’ does not mean ‘cheap’
the key to a subscription business, said baker, is your annual recurring revenue, your churn rate and your customer lifetime value. i agree with baker. in this sense subscription is the opposite of cheap. it’s annual recurring revenue for high-value services on a predictable pricing model that provides clients with preferred access to expert service providers. think of it as the concierge medicine equivalent of financial planning and advice.
how a virtual family office model hits on the keys to a subscription business:
- integrated model with aum fees – recurring revenue
- deeper client relationships – reduces churn rate
- lifetime value of client – increased revenue from additional services
“when people come up to me at conferences and tell me they’re on a subscription model i ask them: ‘do your customers know they have subscribed?’” said baker. “i know i subscribed to things like disney plus, hulu and porsche drive because i can cancel at any time. the second question i have for those people claiming to be on the subscription model is: ‘what’s your churn rate? or what’s your most recent arr (annual recurring revenue)?’ by the way, subscription isn’t just an annual price divided by 12. it’s a plus offering,” said baker. “it’s got a different revenue, profit model and business model. it’s a different entity. and it requires new thinking. and i’m a big fan of spinning out a new entity.”
like baker, i like to talk about the new way of thinking because accountants historically are slow to change, but they do change. the pandemic showed that accountants can adapt and can do it quickly to provide for the many needs of the client when they have to. sometimes i don’t think accountants give themselves enough credit.
baker agreed. “covid taught us that accountants are the country’s financial first responders. we save businesses. we get people out of bankruptcy. we probably added to their health as much as doctors did,” said baker. he said the leading dpc doctors tell him they have to constantly re-educate customers to come see them regularly, not just when they are sick. “ultimately, they want to keep patients healthy. that’s a totally different revenue model, than simply: ‘we’ll fix you when you’re sick,’” said baker. “with the new subscription/concierge model, doctors can reduce comorbidities, reduce er visits, hospital visits and the number of drugs patients take. it’s a different attitude toward health care,” he added.
cpas have long been called the most trusted advisor to their clients, but that’s just table stakes now. they really have to evolve into being their clients’ most transformative advisor. we can’t pay for trust. it’s implied. a trusted advisor is something your customer should say about you. you shouldn’t say it about yourself.
within five years, baker predicts we’ll have the option to subscribe to everything. “your business is going to have to deal with this, regardless of whether or not you do anything with it,” said baker. “i’m not saying that value pricing isn’t a viable business model, i still believe it is. but i think subscription takes us to a new level of transformation as a service,” he said.
“as accountants, we are privileged to be able to guide our customers to a desired future state,” shared baker. “we’re one of the few businesses on the planet that can do that. and we’re not doing that. we’re so tied up in fee for service. and i think that’s a hamster wheel just as bad as hourly billing is a hamster wheel. i want to get off of it and start providing transformations.”
where would you like your practice to be five to 10 years from now?