The Future of Financial Advice: Should You Adopt an Advice-Only Model?
As the financial advisory landscape continues to evolve in 2024, forward-thinking advisors are exploring new ways to deliver value to clients and differentiate themselves in an increasingly competitive market. One approach gaining traction is the advice-only model, where advisors charge solely for their expertise and guidance without requiring clients to transfer assets under management (AUM). In this post, we'll dive into the benefits and challenges of adopting an advice-only approach and help you determine if it's the right fit for your practice.
What is Advice-Only Financial Planning?
Advice-only financial planning is a model where advisors are compensated exclusively through fees for their advice and services, rather than commissions from product sales or a percentage of AUM4. Key characteristics of advice-only planners include:
- Transparent pricing with no hidden fees
- Fiduciary duty to always act in the client's best interest
- Ability to provide investment advice without taking custody of assets
- Reduced conflicts of interest compared to commission or AUM models4
Estimates suggest only around 1% of advisors currently use an advice-only model, but experts predict this will grow as more DIY investors seek guidance without giving up control of their portfolios3.
Benefits of the Advice-Only Model
Adopting an advice-only approach can offer significant advantages for both advisors and clients:
Broadening Access to Financial Planning
By decoupling planning from asset management, advice-only opens the door to serving a wider range of clients, including those just starting to build wealth who may not meet AUM minimums3. This can help advisors tap into underserved markets and build long-term relationships as clients' needs evolve.
"It feels better to work with someone who's excited and interested in financial planning," notes Jon Luskin, founder of advice-only firm Luskin Financial Planning3.
Eliminating Conflicts of Interest
Since advice-only planners do not earn commissions or AUM fees, they can provide objective guidance with reduced inherent conflicts that arise when advisors are incentivized to recommend certain products or gather assets4. This aligns advisors' interests squarely with their clients' success.
Increasing Fee Transparency
The advice-only model brings much-needed clarity to advisor compensation. Clients know exactly what they're paying for, whether it's a flat project fee, hourly rate, or ongoing retainer3. This contrasts with the "free" planning often bundled with AUM fees, which can obscure the true cost of advice.
As Michael Kitces, a leading voice on advisor business models, puts it: "Advice-only can actually be a way to get paid more for the actual financial planning advice itself, rather than discounting it as a loss leader for the AUM fees3."
Challenges of Going Advice-Only
While the benefits are compelling, transitioning to an advice-only model is not without hurdles:
Shifting Business Model and Revenue Streams
Moving away from an AUM-centric practice requires rethinking your service offerings, pricing structure, and income sources3. You'll need to determine what planning areas to focus on, how to package your services, and what fees the market will bear. This can be a heavy lift, especially if you've built your business around managing assets.
Overcoming Mental Barriers for Clients
Despite growing interest in advice-only, many consumers still expect advisors to handle their investments in exchange for a "free" financial plan3. Shifting this mindset and communicating the value of standalone planning takes education and a strong marketing message.
Potential Limits on Advice Scope
Depending on your licenses and registrations, providing investment advice separate from management could run afoul of regulations3. Make sure you understand the compliance implications before taking the plunge.
Is Advice-Only Right for You?
Ultimately, whether to explore an advice-only model depends on your unique practice and goals. Consider these factors as you weigh the decision:
Your Target Clientele
If you aim to serve mass-affluent or HNW clients who value comprehensive wealth management, advice-only may not be the best fit. But if you're passionate about planning and want to work with a broader spectrum of clients, it could be a game-changer3.
CTA: {{Become a Savvy Advisor}}
Your Service Offering
Advice-only lends itself well to modular planning around specific goals or life events, such as a new job, marriage, or retirement. If your expertise aligns with these needs, you may be well-positioned to thrive with an advice-only model3.
Your Capacity for Change
Transitioning to advice-only is not a small undertaking. It requires retooling your services, pricing, technology, and marketing. Be honest about whether you have the time, resources, and stomach to navigate this shift3.
If you do take the leap, you'll be in good company. Advice-only firms like Garrett Planning Network, XY Planning Network, and the Advice-Only Network offer valuable resources and support34.
Strategies for Success as an Advice-Only Advisor
Assuming advice-only is a good match for your practice, consider these tips to set yourself up for success:
Develop a Compelling Service Model
To attract advice-only clients, you'll need a clear and compelling service offering that demonstrates the value of your guidance. Consider specializing in a niche planning area, such as college funding or equity compensation, to differentiate yourself3.
Nail Your Pricing Strategy
Pricing is critical in an advice-only model. You'll want to strike a balance between charging enough to sustain your business and staying competitive in the market. Common fee structures include hourly rates, flat project fees, and ongoing retainers3.
Invest in Client-Facing Technology
Since advice-only clients typically maintain control of their assets, it's important to provide robust tools for collaboration and implementation. Look for planning software with client portals, interactive dashboards, and account aggregation capabilities3.
Educate Clients on the Value of Advice
To overcome resistance to paying for planning, you'll need to clearly articulate the benefits of your advice. Use case studies, client testimonials, and educational content to showcase how your guidance can improve financial outcomes3.
Leverage Partnerships and Referrals
Advice-only planners often rely on strategic partnerships with allied professionals like CPAs and attorneys for referrals. Building a strong network can help you tap into new client segments and expand your reach3.
The Bottom Line
The advice-only model represents an exciting frontier for financial advisors looking to align their services with clients' best interests and build more sustainable practices. While not without challenges, going advice-only can open doors to new markets, revenue streams, and fulfillment in your work.
As you explore this path, remember that success lies in developing a differentiated service model, communicating your value proposition, and embracing the technology and partnerships that can help you scale. With the right approach, advice-only could be the key to thriving in the fast-changing advisory landscape of 2024 and beyond.
References:
3 https://emoneyadvisor.com/blog/advice-only-financial-planning-wave-of-the-future/
4 https://adviceonlynetwork.com
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
The Future of Financial Advice: Should You Adopt an Advice-Only Model?
As the financial advisory landscape continues to evolve in 2024, forward-thinking advisors are exploring new ways to deliver value to clients and differentiate themselves in an increasingly competitive market. One approach gaining traction is the advice-only model, where advisors charge solely for their expertise and guidance without requiring clients to transfer assets under management (AUM). In this post, we'll dive into the benefits and challenges of adopting an advice-only approach and help you determine if it's the right fit for your practice.
What is Advice-Only Financial Planning?
Advice-only financial planning is a model where advisors are compensated exclusively through fees for their advice and services, rather than commissions from product sales or a percentage of AUM4. Key characteristics of advice-only planners include:
- Transparent pricing with no hidden fees
- Fiduciary duty to always act in the client's best interest
- Ability to provide investment advice without taking custody of assets
- Reduced conflicts of interest compared to commission or AUM models4
Estimates suggest only around 1% of advisors currently use an advice-only model, but experts predict this will grow as more DIY investors seek guidance without giving up control of their portfolios3.
Benefits of the Advice-Only Model
Adopting an advice-only approach can offer significant advantages for both advisors and clients:
Broadening Access to Financial Planning
By decoupling planning from asset management, advice-only opens the door to serving a wider range of clients, including those just starting to build wealth who may not meet AUM minimums3. This can help advisors tap into underserved markets and build long-term relationships as clients' needs evolve.
"It feels better to work with someone who's excited and interested in financial planning," notes Jon Luskin, founder of advice-only firm Luskin Financial Planning3.
Eliminating Conflicts of Interest
Since advice-only planners do not earn commissions or AUM fees, they can provide objective guidance with reduced inherent conflicts that arise when advisors are incentivized to recommend certain products or gather assets4. This aligns advisors' interests squarely with their clients' success.
Increasing Fee Transparency
The advice-only model brings much-needed clarity to advisor compensation. Clients know exactly what they're paying for, whether it's a flat project fee, hourly rate, or ongoing retainer3. This contrasts with the "free" planning often bundled with AUM fees, which can obscure the true cost of advice.
As Michael Kitces, a leading voice on advisor business models, puts it: "Advice-only can actually be a way to get paid more for the actual financial planning advice itself, rather than discounting it as a loss leader for the AUM fees3."
Challenges of Going Advice-Only
While the benefits are compelling, transitioning to an advice-only model is not without hurdles:
Shifting Business Model and Revenue Streams
Moving away from an AUM-centric practice requires rethinking your service offerings, pricing structure, and income sources3. You'll need to determine what planning areas to focus on, how to package your services, and what fees the market will bear. This can be a heavy lift, especially if you've built your business around managing assets.
Overcoming Mental Barriers for Clients
Despite growing interest in advice-only, many consumers still expect advisors to handle their investments in exchange for a "free" financial plan3. Shifting this mindset and communicating the value of standalone planning takes education and a strong marketing message.
Potential Limits on Advice Scope
Depending on your licenses and registrations, providing investment advice separate from management could run afoul of regulations3. Make sure you understand the compliance implications before taking the plunge.
Is Advice-Only Right for You?
Ultimately, whether to explore an advice-only model depends on your unique practice and goals. Consider these factors as you weigh the decision:
Your Target Clientele
If you aim to serve mass-affluent or HNW clients who value comprehensive wealth management, advice-only may not be the best fit. But if you're passionate about planning and want to work with a broader spectrum of clients, it could be a game-changer3.
CTA: {{Become a Savvy Advisor}}
Your Service Offering
Advice-only lends itself well to modular planning around specific goals or life events, such as a new job, marriage, or retirement. If your expertise aligns with these needs, you may be well-positioned to thrive with an advice-only model3.
Your Capacity for Change
Transitioning to advice-only is not a small undertaking. It requires retooling your services, pricing, technology, and marketing. Be honest about whether you have the time, resources, and stomach to navigate this shift3.
If you do take the leap, you'll be in good company. Advice-only firms like Garrett Planning Network, XY Planning Network, and the Advice-Only Network offer valuable resources and support34.
Strategies for Success as an Advice-Only Advisor
Assuming advice-only is a good match for your practice, consider these tips to set yourself up for success:
Develop a Compelling Service Model
To attract advice-only clients, you'll need a clear and compelling service offering that demonstrates the value of your guidance. Consider specializing in a niche planning area, such as college funding or equity compensation, to differentiate yourself3.
Nail Your Pricing Strategy
Pricing is critical in an advice-only model. You'll want to strike a balance between charging enough to sustain your business and staying competitive in the market. Common fee structures include hourly rates, flat project fees, and ongoing retainers3.
Invest in Client-Facing Technology
Since advice-only clients typically maintain control of their assets, it's important to provide robust tools for collaboration and implementation. Look for planning software with client portals, interactive dashboards, and account aggregation capabilities3.
Educate Clients on the Value of Advice
To overcome resistance to paying for planning, you'll need to clearly articulate the benefits of your advice. Use case studies, client testimonials, and educational content to showcase how your guidance can improve financial outcomes3.
Leverage Partnerships and Referrals
Advice-only planners often rely on strategic partnerships with allied professionals like CPAs and attorneys for referrals. Building a strong network can help you tap into new client segments and expand your reach3.
The Bottom Line
The advice-only model represents an exciting frontier for financial advisors looking to align their services with clients' best interests and build more sustainable practices. While not without challenges, going advice-only can open doors to new markets, revenue streams, and fulfillment in your work.
As you explore this path, remember that success lies in developing a differentiated service model, communicating your value proposition, and embracing the technology and partnerships that can help you scale. With the right approach, advice-only could be the key to thriving in the fast-changing advisory landscape of 2024 and beyond.
References:
3 https://emoneyadvisor.com/blog/advice-only-financial-planning-wave-of-the-future/
4 https://adviceonlynetwork.com
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
Savvy Wealth Inc. is a technology company. Savvy Advisors, Inc. is an SEC registered investment advisor. For purposes of this article, Savvy Wealth and Savvy Advisors together are referred to as “Savvy”. All advisory services are offered through Savvy Advisors, while technology is offered through Savvy Wealth. The views and opinions expressed herein are those of the speakers and authors and do not necessarily reflect the views or positions of Savvy Advisors.
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