On this episode of You’re a Financial Planner, Now What? we’re breaking our normal guest/host interview style for a “Roundtable Event.” Our hosts, Hannah, Matt, and Ian, got together to talk about something they know can be frustrating for new planners: compensation models.

While normal conversations around compensation models are usually focused on “fee-only” or “fee-based” decisions, the reality is that there are so many more models to choose from. And how you choose your compensation model depends on your clients. Whether you work for a firm, own your own, or are part of a succession plan, this compensation model discussion covers a lot of ground. The hosts talk about how to decide on a fee model, how that model guides your client base and business, and why innovation in the profession should be at top-of-mind.

4 things to think about with compensation models

One thing Hannah, Ian, and Matt all drove home in this episode: compensation models shouldn’t just be about what the planner wants to make. It should be about the clients and how the planners wants to serve them. As Ian put it, we as financial planners should make sure we are providing enough value for our clients and that we charge for that value in a way that feels best to us. 

Of course, there are other factors that go into picking your compensation model, like:

  • Revenue. How much do you want your firm to make, or how much do you need to bring in per year as a partner or associate in a firm? 
  • Cost. How much does it cost to provide services to your clients (software, overhead, employees, etc.)
  • Profitability. At the end of the day, you need to make money on your services. Which model allows you to make your preferred profit margin?


And for those who want to own their own firm or reach partner level within a firm, you also need to consider how you want to run your own business and be compensated as a business owner.

If you want to own (or partner in) a firm

Often, for your first job in the profession, you learn the compensation model of the firm that employs you. And if you want to continue working in an established firm, you may not have much flexibility in the compensation model you choose.

But if you want to own or partner in your own firm, you’ll need to explore compensation models that fit your business model and how you want to serve clients. In essence, you need to be business-minded, not just planning-minded. To do this, you’ll need to know who your clients are, how to serve them, and build a business and compensation model around that. 

Hannah added that, for many who are new to building a firm, the compensation model falls strictly on “How much will I take home?” As a business owner, you’ll of course need to consider your take-home salary and the costs of doing business, but you’ll also need to discuss how you want your firm to grow: do you want it to be a lifestyle practice? A firm with partners? That will all guide your compensation model and how you structure your services. 

However, for new planners, especially those in the younger generations, the choice of compensation model extends far beyond the technical side of revenue, profits, and services offered. Instead, it has to do with making the profession more accessible and adapting to new ways of doing business within the profession.

The “changing of the guard”

While there is a place in the profession for every type of compensation model, Hannah, Ian, and Matt definitely drove home the point that times are changing. If you want to serve a certain demographic of people (say, Millennials who make less than $100,000 a year), you may not be able to charge thousands of dollars a year for investment advice. You may not have AUM, or charge a yearly financial planning fee. 

With new technology, you may be able to serve multiple hundreds of clients, where before that may have not been possible. In each of these instances (and countless others that will come up), planners will have to adapt to a new model that fits their particular clients — and not the public at large. They’ll also need to “forge your own path” compared to how financial planning has always been done.

But there’s something that makes this harder than most of us realize: we aren’t really exposed to new ideas, nor are we told that it’s OK to try on a new compensation model. If you’re employed within a firm, you can’t even really talk about disruption and how a new compensation model may better serve clients. This means, to some extent, that there needs to be a “changing of the guard” as Matt put it. New planners should think about the future, about the changes that are coming, and keep that in mind as they build their experience and firms (if they choose that path).

Because the question at the end of the day isn’t “How much money do I want to make?” It should really be: “Am I willing to adapt to change to give my clients the best service and the best products?”

Hannah's signature

[tweet_box design=”box_10″ url=”https://buff.ly/2Qi26ig” float=”none” excerpt=”If we want to create a profession that creates access to everyone, then I think we would find different ways to do this business. – @IanHarveyNYC on #YAFPNW“]If we want to create a profession that creates access to everyone, then I think we would find different ways to do this business. – @IanHarveyNYC on #YAFPNW 169[/tweet_box]

What You’ll Learn:

  • Why it’s important to continue the conversation beyond “fee-only” and “fee-based”
  • The four things you should consider when choosing a compensation model
  • The line between being a good planner and a good business owner
  • Why you should think about how clients pay you, rather than what you charge
  • What Millennials bring to the table that planners of other generations haven’t
  • The future of financial planning (and the opportunities it brings) 
  • The value of meeting other planners and constantly learning about different ways to do the work
  • Why conferences are a great asset to planners of any experience level


Show Notes:

In this episode, Hannah, Matt, and Ian talk about compensation models. There are a few YAFPNW episodes that help continue the conversation so you can decide which model is right for you:

We also have more compensation model discussions coming up on YAFPNW, so make sure to subscribe wherever you listen to podcasts! If you’re loving what you’re hearing, we’d also appreciate a review on whichever platform you’re using. It helps other next gen planners find us!


[show_more more=”Show Transcript” less=”Hide Transcript”]

Episode Transcript

Hannah: Well, thanks for joining us today, everyone. As we were planning out the podcast, we were wanting to talk a lot about compensation models. With a new host, we had such a lively conversation about compensation models and what the different types that are out there. What new planners especially need to know about compensation models. It was so great that we were like, “You know what, we’re just going to do a round table.”

Hannah: I have today with me, Matt Fizell and Ian Harvey, both you’ve heard them on the podcast as two of the new hosts. Let’s just jump right in. When you hear compensation models, what immediately jumps to your mind? What are the considerations when you hear that?

Ian: When I hear compensation model, I think revenue, cost and profitability. All of those three things have to be factors when you’re determining whether or not your business will survive long periods of time, rather than be more of a flash in the pan style business.

Matt: Yeah, I would definitely agree with what Ian said, but I would also add to that. That, we as financial planners want to make sure that we’re providing enough value to our clients for the fee that we’re being compensated with by our clients.

Hannah: You know one of the things, if people have been listening long enough, they know more of my story of how I came back. Was in a broker deal model. I bought two practices. I had 250 to 300 clients who were all different types of compensation models. As one of my friends who was in a similar situation made the comment, he was like, basically, anything from the 1980s to today, it was in my book or my practice, if you would.

Hannah: It’s one of the reasons why I’m so passionate about planners when they run a business, they have to be good business owners, because there’s a lot of people who are not good business owners. I had between 250 and 300 clients, it was crazy. I left the broker dealer. There’s several different factors, starting with the year that I left, I had significantly less clients, and I took home the same amount of money.

Hannah: When I hear compensation models, I immediately tie it to how do you run a business? How do you run a business really well? I think that’s absolutely critical. Because of how I structure my firm in a compensation model, I charge an initial financial planning fee, and then I charge AUM on top of it. My minimum fee right now is like $10,000 a year. Because I do that, it gives me a lot more flexibility in how I run my business, which I think is a huge advantage.

Matt: Yeah, I would agree with that. I may be a little biased now that I work with you.

Hannah: Just to give the listeners an insight into that, Matt was my paraplanner for the last year, working about 10 hours a week. He recently moved to Dallas to work with me full-time.

Matt: Coming from a space where I was working with multiple planners as a paraplanner, there were just some constraints that those business owners had. That was directly tied to the fact that they probably weren’t charging enough for their fee. That created bottlenecks in how much time I could give them, what additional services or technologies they could bring into their firm.

Matt: I think it’s important to be conscious about what we are charging our clients, and making sure that we are charging a fair price. Also, pricing into the fact that we need to be strong business owners, and be a strong healthy business, so that we can continue to add a higher level of service going forward.

Ian: Yeah. I think what’s coming to mind for me is, to me that’s back to costs. In order for you to provide the right value, you need to hire a paraplanner, which has a cost which bakes in, and then gets passed onto your clients. On some level, if you’re able to provide that value without spending more money, you can charge less. I think what Matt and Hannah are talking about is, or it sounds like what you’re talking about is that, that you need this paraplanner so you then have to raise your fees.

Ian: One thing that comes to mind is, as we think about the future of financial planning and who can have access to the services, how do we get a little leaner where we can drive those costs down? Then offer financial planning at a fee that’s less than $10,000, which arguably a greater portion of the United States at least would actually be able to afford it?

Matt: Yeah, and I don’t even know if we need to use the word leaner or drive costs down. I think there are advisors out there who are doing a great job of charging a more accessible fee. They’re doing a really, really great job of putting a box, or a limit on what they’re servicing those clients with. It’s just when you get to that point of charging a lower fee and overstretching yourself, not only as a financial planner, but as a business owner, where people really start to run into these constraints. These headaches, and these amounts of stress, because they just can’t keep up with the work.

Ian: Right, exactly, which ties back into what we saw with the margin compression within the profession outside of simply fee compression, which was the fear for a number of years. What we ended up realizing was more margin compression, right?

Hannah: Talk more about that, Ian.

Ian: Yeah. I think the concern was that, the average consumer would be only willing to pay so much for financial planning. Robo-advisors came in, different solutions came to the table where you could access financial planning for cheaper. The fear was that the more highly compensated financial planners would maybe not be able to charge as much. What I think they found is that, the clients are still willing to pay higher fees, but they’re expecting more from a service perspective. It takes more for someone who does strictly investment management with some estate planning, to retain their clients when they can pay either $10,000 for the investment management plus some estate planning. Or they can pay $10,000 for comprehensive wealth management, which encompasses everything goal-based, estate planning, insurance planning, tax planning, education planning. Everything that comes with that is being charged at the same rate.

Ian: Investment managers are having to perhaps do more, so they have to hire more folks to actually do that kind of work. Which means their salary costs and perhaps technology costs et cetera are rising, and our clients are still willing to pay the same fees.

Hannah: You know, one thing that is striking me as we’ve had this conversation about compensation models is, it’s a lot of these I really think it should be driven by, what do our clients need? Who are our clients and what do they need? I think often the compensation conversation is about us instead of about our clients. I know that’s one thing that I would hope that we see a change in the future. It’s not just about how do we get paid, it’s how do our clients pay us? Who is the subject of what we talk about?

Matt: Yeah, so you’re basically getting at the fact that, when we’re posting in FPA Activate, or the XYPN VIP Radio group, we’re always asking, “What should I charge my client?” Versus we should be asking, “What are we providing our client?” Is that what you’re getting at with that?

Hannah: Yeah. I think it’s what are we providing our clients or just asking our clients what they want to pay.

Ian: Yeah, no. I think the conversation around who we’re talking about is important. That’s where the $10,000 number strikes me, because that’s a particular sect of people who can afford to pay $10,000 for service. With the average American has $400 or less in their bank account, I don’t know that we’re looking at financial planning becoming a true profession with access for everyone. If we continue to build firms based around $10,000 fees, so that people can be more efficient and do more things they enjoy.

Ian: Now, not to say I have anything against those kinds of firms. I think again, maybe in a similar vein as you’re thinking about who we’re talking about, we need to be thinking about what the future of financial planning might look like.

Hannah: It’s interesting because, one of the things that I struggled with a lot is, I mean I talked to all my friends about what I do and different things like that. I had multiple people come up to me and say like, “Hey, we’d love how you talk about your work, we want to work with you.” Especially given my background, how I did have like 250, 300 families that I was working with, it’s extraordinarily difficult to work with that many people. I was like, “You know I know my practice, I know exactly who we serve. I’m sorry, I can’t.” My model doesn’t fit my peers.

Hannah: It’s been an interesting struggle thinking through that and coming up with like, okay, if I want to serve them, which I do, and I know that’s something I’m actively exploring. It’s going to be have to be a different model, a different compensation model, because it’s a different market.

Matt: I think that’s a really great point to make. Also, Ian what you said with, what is this profession going to become, we come from a place where, like Hannah mentioned at the broker dealer or her previous firm. That, we gathered all of these clients, we gathered all of these assets, and we charged AUM. To a degree you were getting paid based on the assets, not on the amount of work you were doing.

Matt: I think we’re starting to see that shift with flat fee planning, monthly planning fees, annual set flat fee planning. That, you don’t necessarily have to hold on to all those clients. If you do find a particular type of client that you service very well, sometimes the best thing that we can do as a financial planner is let that person go to a more specialized service at some point down the road. I think that’s something that we just have to come to grip with as professionals.

Ian: Yeah, and we have to keep the door open to innovation. The idea that financial planning must be done in a way that is white glove service. We do everything for you, so that you don’t even have to think about this. If that’s the only goal of the folks who are within the profession, then we will limit our ability to create or enlarge access to financial planning.

Hannah: Ian, it’s even easier to saying that’s like, it comes down to, again, it’s not about us, it’s about knowing your client. Knowing your client, knowing the value that you can provide for them. In my example, I work with a lot of retirees and certain wealth folks. It’s the value that I provide to them, I wouldn’t need that in my life. That’s not valuable, that would not be personally valuable to me. Obviously there’s good things and there’s crossover, but I wouldn’t pay a premium for that. I think it’s knowing your clients, and then therefore building your compensation model around that.

Matt: Right, and that also plays into the larger scheme of profitability, which is what Ian had mentioned. He and I know we’re going through this as we start to build some processes for the firm. You can’t do everything for everyone really well. You certainly can’t be a good business owner who’s not pulling their hair out when you’re trying to serve everyone in every way imaginable. Like Ian said, just knowing sort of to stay your lane and serve those people that will pay a premium or pay what is fair for your specialized service, and let the others go to someone else. Hopefully just refer them to colleagues that you’ve come across who are serving those clients.

Ian: If technology allowed you to become more efficient, where you’re… Let’s say, how long does it take you do you think to prep for a client meeting?

Hannah: It depends on the complexity of it.

Ian: Sure.

Hannah: I would probably say four to eight hours.

Ian: Right, so if you could instead prep for a client meeting in 45 minutes to an hour, and you could spend those other three hours prepping for different meetings, do you think it would be sustainable to have 300 clients?

Hannah: I mean, I think people can do it, and I think there’s models out there that are testing that. I definitely think that’s possible. It is a struggle I’ve always being on.

Matt: Right and I think a bigger struggle to, and I’ve seen this in more so in the flat fee space. It’s not necessarily how many meetings you have, right? You know what your client’s service schedule is. You know if you’re doing two, three or four. You know how many hours of prep on average might be before those meetings. It’s the little things in between that really bog people down, when you start to have 200, 300 clients.

Matt: You know just those phone calls, those emails to get some extra cash in their account so they can go on vacation or fix the roof. Or buy a lake home, or whatever it is they want to do. It’s those little moments in between that really start to compound when you have hundreds of clients.

Ian: Yes.

Hannah: It’s like we need to do a video. One of the things, as I’ve grown as a business owner, which has really helped me as I think about compensation models. We’re really tying this really close to compensation models and how you run a business. It really is how this conversation’s going. We can talk more, maybe later more specifically about specific type of compensation models, and the strengths and weaknesses of them.

Hannah: One of the things that I found in my practice, I mean, I was making six figures in my business. I was like, “Oh, this is great.” I started working with a business coach and it was really like she forced me to think about my business differently. Thinking about, how do I get paid as the owner of it? What I started doing is mapping out like, what do I take home as a salary? That goes into a different bucket than like my owners draw. You take your overall profit that the firm makes, then you have like your salaries. Then you have your overhead and then you have, what’s the word I’m looking for?

Ian: Profit?

Hannah: Yeah, the profit, I guess it’s that simple. It’s the profit on it. One of the mistakes that I was making, is that I was lumping together my salary, and the profit of my firm like together. It was like oh, I was making a pretty good income from my firm. As long as I was thinking about it that way, I was always going to be a lifestyle practice. If I ever wanted to grow, I needed to just start thinking in terms of like, what is my salary? What is somebody with my years of experience, doing the work that I’m doing, what’s a salary that’s coming into by that? Then, what’s a profit margin that I want to have in my firm?

Hannah: Like for me, there was a discrepancy. When I did that I’m like, “Oh, well, I should be making more with my years of experience and all this different things.” It helped reshape the business and how I was looking at it. It’s one of the common mistakes that I see, especially with people who are starting up. They’re looking at the total take home money that they’re bringing home, instead of looking at, what is the true profitability of their firm based on what a salary would be for them?

Hannah: I get it, when you’re starting you’re like, “I’ll take anything.” As you grow, and we scale these businesses, I think that’s absolutely critical for us to be thinking in those terms.

Ian: Which is the decision point at the beginning, which is what type of firm do you want to build? If you want a lifestyle practice, there’s absolutely nothing wrong with that. Then every dollar you make is yours. The only reason that it would go down is if you have to hire staff to continue to foster your current client base with relative growth, so that you stay roughly the same size to support your lifestyle. If the goal is to take on partners to grow the firm, so you have more and more employees and it outlives you, then you do. Exactly what you’re saying is to start thinking that way, which in the beginning doesn’t affect your salary. It starts to affect your salary once you bring on more employees.

Ian: Remember, your first employee is not a partner, or perhaps won’t be a partner right away. That increases the salary number you have to pay out, but doesn’t affect the profit margin or the profit number, I’m sorry, that you take at the end of the year. That number is still the same and growing for you as the business owner. Changes once you take on that partner, which leads to what should be the growth imperative for firms who are trying to not be lifestyle practices.

Hannah: This is really why like, so I used to call your financial planner now. It’s like I know a lot of her audience is just getting into financial planning. I think why it’s so important is, recognizing what type of firm are you at? When you go to work in a firm, what do you need to see to know that there is a career path for you? Or that there’s potential there? Is it a lifestyle for him? That’s great as long as the expectations are laid out there. I hear so many people who are 35 years into a job, and they’re like, “I’m not going anywhere.” They end up leaving. I think some of this, some of it you can spot at the beginning of how the business is structured and how the growth of the business.

Matt: Yeah, so Hannah, just as someone who went through that, what are some telling indicators of a lifestyle practice? What are some questions that I as a younger financial planner could have asked to get some of that out on the table faster?

Hannah: I mean, what’s your marketing plan? I think to Ian’s point of that growth imperative, and I’d love for him to talk more about that in a minute. Is the firm growing? If you’re not growing, it’s fine not to grow. I have so many planners who have this amazing lifestyle practice, but that’s exactly what it is. Are you growing? What’s your marketing plan? Where are you finding new clients? What do you see? Where do you see your firm in five or 10 years? What are the other decisions that they’re making? Do they have the infrastructure? Are they focused on building out the process? Is it a process driven firm or is it kind of a hot mess like a lot of firms are? To me those are some of the questions.

Hannah: Then I think one of the other elements is going back to this compensation model is, follow the money. How are your clients compensating you? Or how are the clients compensating the firm? You might not get all this information, but you can get a lot from an ADV. How much is each client paying? I think that’ll be really telling, because if every clients paying $1500 a year, you know you’re going to be a much more high volume business, which is fine. You can absolutely do that well.

Ian: For anyone who’s listening, reading the ADV is number one when you’re looking for a job, regardless of whether or not it’s a lifestyle practice. You can glean what the rough revenue of a firm is heading into that meeting, so you’re aware. Then you can start to sort of parse out who makes what and figure out the numbers. I can tell you a quick story, and I’m not sure if this should be in the episode. I always say that and then let you and Charlie figure that out.

Hannah: Okay.

Ian: I was applying for a position that had a subscription model. You basically could look at the ADV, you could find out how many advisors they had and how many clients they had as of the date the ADV was filed. Then you can take an average, how many clients per advisor work here at the firm? With a subscription model, you can make some assumptions. I assumed that everyone was paying the highest, that every client of this firm was paying the highest subscription level possible. I realized that the money that they offered for the position was more than the gross revenue I could provide that firm, if I maximized my clients based on the averages from the ADV. That was a red flag to me. I knew that I couldn’t possibly earn them enough revenue to sustain me as an employee at the firm. I decided to then not take the job.

Ian: I think what’s a fair question to try to understand is, one, do you have any current partners? Have you started your succession plan? Depending on where you are in the interview cycle, I don’t know that it’s completely out of bounds to ask how the firm is set up from a profitability perspective. How much goes to overhead? How much goes to salary and how much is left for profit? It might depend on your relationship with the interviewer, and sort of, again, where you’re at in the interview process.

Ian: If you’re coming in as a first year financial planner, as your associate and you know that partners don’t become partner until 10 years into the job, it might be putting the cart a little bit before the horse. I don’t know that an employer would fault you for looking ahead and trying to understand the numbers. For what it’s worth and for rough numbers, it’s essentially a third, a third, a third. A third goes to overhead, keeping the lights on, paying rent, all of the things that go into that. A third goes into paying salaries, which by the way includes everyone’s salary. That’s owners, that’s associates, operations, marketing, everyone’s salary goes into that third bucket. Then the last third would be profit, which is split up by the partners. That’s something John Yankee talked about at retreat this year, which perhaps we should have an episode with John to talk about this.

Ian: The purpose of that firm is clear. We’re setting it up so that there is money for profit to be paid to partners. For those of you who want to become partner one day, recognize that becoming partner is not a cheap aspiration. Most of the time you have to buy into the firm, unless you’re fortunate enough to be granted shares of the firm. Buying into the firm typically comes with a note or a loan, simply because folks can’t afford to just pay out of pocket to become partners in a firm. Now you’ve got hundreds of thousands of dollars of debt that you have to service year after year. That profit number you’re paid will help cover the payments for that loan overtime. That sort of structure will help guide you in terms of understanding how the firm is set up, in order to bring partners on and foster employees to actually get to that role and stay for the long-term.

Ian: Can we talk a little bit more about the concept from which perspective we’re talking about compensation? I think what I’m thinking about is, anytime a new tax is implemented, the big concern is, well, the company is just going to pass that off to the consumers. In some way, the more we increase our costs, or the longer we refuse to find ways to drive costs down, we in some ways keep financial planning from the folks who can’t currently afford it.

Ian: I think there’s two things. There’s the growth imperative for the firm’s which we talked about. Which means, they keep taking on clients, maybe because they don’t need to, but because they want to foster their firm to grow to keep employees longer, to have more employees. On the other side, there has to be a way in which we’re consistently reviewing the cost structure of our firm. Finding ways to be more efficient, to pay for technology that does cut costs in other areas, so that we can take on more planners or whatnot.

Hannah: It was interesting, I did an interview with Bob Barris about a month ago. One of the things I challenged him with is, you know we look at a lot of these new compensation models that are out there of subscription based models. There’s a firm that I’m familiar with, and I was talking with some of their employees. They’re like, with the struggle that they’re having is that the margin on their traditional clients is so much larger than the margin is on the subscription model. They’re struggling from like a business decision of saying like, “We’re putting all these resources into something that’s not giving us a higher return.”

Hannah: I asked Bob, “What would you tell this firm?” His response to me was, “Get used to it, this is the future.” It stood out to me, and it’s like, is that the future? Is the future where we are charging less? Is the future that we are doing these subscription models, that we are charging differently with a much lower margin?

Ian: Yes.

Matt: I think that goes back to the beginning of your conversation though, who are you trying to serve? Are you trying to serve the mass public? Or are you trying to be more of a specialized practitioner as a financial planner?

Ian: Which I’m back to, we have to be a little open in terms of the future of the profession, right? We have to have a space where in the tax world there’s H&R Blocks where you can pay 100 bucks to go get your taxes done, and it is good tax work. If I’m a simple W2 employee, single, no kids, I don’t itemize my deductions. 100 bucks to get my tax return done is more than adequate work. I think on some level, the profession of financial planning right now is kind of stuck in this world, where I hate to say the old guard, I’m not sure the best way to say it. Folks who’ve been doing this for a while and offering super, high level service might believe that that is the only way to successfully do financial planning.

Ian: Where what we were talking about before, I think Matt and Hannah you were both talking about it, where the service model has to change. What Hannah was saying before where, you could offer your services to a young 30 something year old, but your services wouldn’t exactly be what they would pay a premium for anyhow.

Ian: I think we have to be okay with the idea that for financial planning to be long term successful, which by the way, I think it’d be interesting for us to have a conversation about what is a successful financial planning profession. I think we can measure that by a few different things. Something I measure that by, though is, what is the financial well being and health of the average person who lives in our country? I don’t know that we are answering that question with the way financial planning is set up right now.

Hannah: It’s a whole financial planning 3.O conversation right there. It’s a great question, how do we measure the success of us as a profession?

Ian: Where does compensation model play in? We’ve talked about this before, and I’ve written about this I tend to be a big compensation model agnostic, because at the very basic level, I would love to see financial planners hold themselves responsible to some sort of moral and ethical code. Which in theory, then people could sell products and in order to keep the food on the table for themselves, and to offer the financial planning advice that people need. Which we’re seeing more and more that with like with insurance being fee based now, there’s avenues for that. I think we have to keep our minds open.

Matt: Right, and I think it goes a lot to what you said Ian, like that old guard mentality. Like this is the only way to experience, that I don’t think that’s true. I think we can take cues from something like the medical profession. I know we talked about this in our initial conversation, where everyone should have a general practitioner who knows what most people need to know. Those general practitioners at the same time need to be okay sending them to a specialist. Your general doctor, your family medicine, they’re not dealing with severe ear, nose, and throat things. They are sending you to an ENT to have further evaluation and recommendations made. That goes on and on throughout the medical profession, with cancers, with fertility issues, things like that. You send them somewhere higher and at a higher cost, when that is what they need. We need that, that gatekeeper that general practitioner to be okay with that. I think that’s a big piece that we don’t have yet in financial planning.

Hannah: I think if I could summarize some of this, as we’ve been talking about a lot of like business model the business side of it, with a compensation structure. I think the point that we’re getting at is, you need to be at a place where you’re charging your client, your client’s paying you enough to where you can run a successful business. Unless you want to do a lifestyle practice, and that’s absolutely a decision that you can make. I think that’s really the key in this compensation model, it’s not so much how you charge your clients. It’s what’s the type of business that you run, and making sure that, that’s going to be a sustainable business.

Matt: I know Hannah, like you mentioned, it has to be a sustainable business. We always see people who are just starting their businesses, “How much should I charge? What are other people charging?” That number, it’s just like financial planning. It’s going to be different for each individual starting their business. Understanding that, yes, you don’t want to charge your clients an excessive amount of money in your own eyes. You also need to keep the lights on so that you’re actually there to serve that client after they’ve trusted to sign you as their financial planner. To continue to serve them in bigger and better ways.

Ian: I don’t run my own business, as this all comes with that caveat. It has always been a fascinating question to me about, what should I charge my clients? If I was working at, you know when I worked when I was younger, I worked for the landscape crew. I knew the numbers. If we bought material for X, we charged 2X or 3X. Then, whatever he would pay me to go work, he would then charge a client 2X or 3X, and then make his margins. I think the conversation around what should I charge my clients is sort of based in what is everyone else charging, and I have to charge market. Rather than understanding the cost and backing into what it does cost to do financial planning period. To me, on some level, it is a math question. Am I wrong in that?

Hannah: No. I think that makes a lot of sense. I think it’s so interesting looking at financial planning as a profession. Coming out of the insurance in the brokerage world, it’s making broad generalizations here. A lot of financial planners, they don’t know the best way, they’re not the best business owners. They’re exceptional planners, they do great work for their clients. They don’t necessarily know how to run a business well.

Hannah: As I’ve talked to various coaches and some older planners, they talk a lot about how millennials and one of the impacts that they’re having on the workplace right now, is that they’re much, millennials tend to be in generalizations, they tend to be more business focused. They know how to run a business better or more intuitively, or we’ve been trained to think in that way. Whereas, some of the ‘old guard’ hasn’t been.

Hannah: It’s a huge value add that we bring, but I do think that, that there is a shift that’s happening. Everything you’re saying Ian makes complete sense, because in the decision isn’t, “Well, can we do this one off for you?” It’s like, “No, really can’t afford to do this at this price.” When you look at a contractor, they’re not going to charge something that they can’t afford to do. They would know that, and I think your point is very well taken.

Hannah: I mean, the other side of it is, we are a service business so there’s the capacity issue that makes sense if you’re filling all 40 hours. If you’re only feeling 20, I think that gets into some of it. Again, if you’re running a business well, you know your marketing plan. You know your marketing pipeline, you kind of know the rhythm of your business. I agree with you Ian. I think that’s part of the professionalizing financial planning.

Ian: Just a quick plug for all the millennials who haven’t bought a house yet, it’s the same thought process. Why would we choose to go into debt for the sake of buying a house without being first sure whether or not we could afford the loan? Then we delay, and it looks like we aren’t doing what we should be doing. That is, realizing the American dream of a white picket fence and a house by 30. Instead, it’s more of a math question, and we’re looking at the numbers. We’re realizing student debt, and we’re thinking, “Hey, this might not be the best move for me right now.” Then we apply that to the business, where we need to understand the costs that are going into it. I think we can sort of back into the number it cost a financial planning.

Hannah: What I think is interesting, because we’ve been talking about the framing of this whole podcast, this whole conversation is around compensation models. We really haven’t dove into different types of compensation models. It’s interesting because in a way I think we’re saying like, it doesn’t really… If you’re charging AUM, if you’re charging a flat fee, if you’re charging subscription, if you’re charging hourly, whatever that may be, we’re not really making a claim on that. We’re just feeling like you need to know your profitability, you need to understand how the businesses run.

Matt: Right, because no matter which fee model you choose, there’s those who charge probably too much, those who don’t charge enough, and those in between.

Ian: Right, but they’re not general. If I’m a planner, and I pay X, Y, and Z for technology, will call it 60 grand a year. If I’m a separate planner, and I work with a separate organization, who provides my technology for $20,000 a year, those two planners all else held equal can charge less. On a whole, I think it would behoove us to look at technology, look at cost. Try and figure out how we can be more efficient, and then create that access.

Hannah: One of my favorite podcasts is Josh Patrick, he talked about succession planning for business owners. He talked about financial planning. Go look it up, great episode. When I look at the margin, you were talking about a third, a third, a third. A third profit margin is really high across like all business standards. Usually it’s like 12% to 13% is what a healthy business would be. I was talking to Josh, and he was making a comment, he’s like, “You know, when you look at that, when you look at any industry of profession that has that high of a profit margin, it usually means that disruption is coming.” Disruption doesn’t usually come from within, it usually comes from outside coming in.

Hannah: It was a fascinating thought process of, a lot of what you’re saying is technology and software base. It’s what is going to come in and disrupt us so that we have to drive those margins down, because there’s a better way of doing it. I don’t know the answer for it. I wonder, what if Amazon or Apple or somebody wanted to step into this space? Obviously they’re not doing it right now, but it does make an interesting, a very interesting question.

Ian: Yeah, well take Amazon for instance, and then look at Walmart. What did Walmart do? They adapted. If they would have adapted sooner, they could have been ahead of this curve much, much sooner. I think what you’re hearing Hannah say, for folks who are working at firms who’ve been around quite some time is that, one great value add you could have is to build the relationships within your firm, to a level where you can have these conversations. You’re not going to have them on day one. You might not have them five, six, seven years in, but you could be at a firm and create relationships to the point where you can say, “Hey, here’s what’s happening outside of us. Here’s how we can adapt sooner so that we don’t get caught.”

Ian: The analogy I’ve used, and I’m sure Hannah has heard me say this before is, the locomotive industry wasn’t prepared for airplanes. In theory, locomotive companies could have been transportation companies rather than train companies. In which case, they could have been ahead of the curve and had planes on their books, and been a transportation company that can do all things. When you’re just the train company, and then new technology or new abilities come through, you take a big hit. That doesn’t mean locomotive companies aren’t around anymore now. They’re fewer, they’re less profitable. I just think it’s something for us to be thinking about as financial planning evolves, recognizing we’re only 50 years old.

Hannah: Somebody who’s listening to this podcast could be the disruptor, one of the drivers behind some of this disruption. That’s just crazy exciting.

Matt: Yeah, and then you add the capacity issue, not like of just today’s financial advisors and financial planners. There’s not nearly enough to serve the amount of clients that we could potentially have, and maybe this isn’t for the episode. Do you think that’s like part of the reason Ian why we haven’t seen people’s adapt to a lower price model, just because there are so many prospective clients out there?

Ian: Yeah, if your lens is a revenue, then why in a world would you change? Everyone, regardless of what generation you’re in, thinks about what am I doing with my time. The more you listen to folks who are more experienced in their careers, they talk about enjoy your time, all the things you can do with time. If what I can do is charge more with less clients, I can free up more time to do other things. That doesn’t mean you’re not working, you might be working on something else.

Ian: If your lens is we want to create access to financial planning, you will find a way to be profitable in that space. I think a lot of it has to do with attendance by which we operate, and how we think about what our business is here to achieve. If we’re here to create a big giant pile of money, then the way the world is set up right now for the next, I don’t know, five to 10 years until a big shift happens like Hannah’s suggesting, then yeah. You can continue to create a business with the top 1% of America, and there can be many of them. We can all sit around and be fat and happy. If the answer is, we want to create a profession that creates access to everyone, then I think we would find different ways to do this business, so that we could create access so that we could find ways that everyone can participate.

Matt: Right, and maybe the right answer isn’t necessarily to live leaner in our business, and you use these technologies to be able to charge less. What if we instead took some of that revenue and that heavy concept that you’re getting out there, and just invested it into these newer spaces, these less expensive solutions for financial planning?

Ian: Yeah, which I think means the current generation, and the generation that came before us, who are still working and doing amazing work, have to sort of make that investment. Which is a hard thing to do, I think for businesses. Folks work really hard to create super successful businesses that are highly profitable. Then on the back end to say, “Thanks for doing all that great work. Now let’s take a good chunk of that money and reinvest it, so that we can create a better world,” is assuming I think that we come with a certain sense of altruism. Which I don’t know that is inherent and everyone works in financial planning.

Hannah: I don’t know that we have the answer on the right compensation model to reach the masses. How many clients can one planner work with? I mean, I hear anywhere from 40 to like 250, 300 is kind of what I hear. We’re always going to be capped at that. There’s new business models out there that we haven’t applied yet, or we haven’t discovered and that’s really exciting to me.

Ian: I’m loving this conversation. I feel like we’re somehow we’re on opposite sides of the table talking about the same issue. We’ll somehow meet in the middle. I think you’re right. Sometimes I get frustrated with the concept that we can work with 150 to 200 clients, and that’s it, and that it will always be that way. In theory, you could maybe make one or two cars a month when the original car came out. I’m not sure by the way if people are fact checking and sending it in, whatever. I’m not sure if that’s right.

Ian: Let’s say you can make one to two cars a month in the beginning of cars. Now they make thousands of cars a month because technology changed.

Hannah: That’s a really good point.

Ian: I think we have to expand what is the opportunity, what is the scope of possibility? Start there. What if firms could service lots of clients, and the planners were driving how the advice was being delivered? I think it’s just a, it’s a conceptual thought about, sure, if you lock yourself into this space or 200 clients is the max for any individual advisor, then you sort of set your parameters right there. If we think about our goal is greater access, then I think we open up the possibilities. Then that changes compensation structures, that changes models and allows different models to evolve. If we lock ourselves in, in almost any area… Think about annuities. Annuities are coming back. Who would have thunk?

Ian: Five years ago, we were at firms, and we’re all pounding our fists on the table, “I’ll never ever, ever, ever, ever, ever, ever tell my client to buy an annuity.” Yet, research is coming out that if clients have some source of sustainable income through retirement, their plans are more likely to be successful. I just think that’s fascinating to think that annuities would come back after years of bashing annuity so to speak. We have to think about the actual consequences of cutting anything out as a possibility. Recognizing what the current status is of whatever you’re working in.

Ian: When annuities were too expensive, then sure, no, I’m not going to give my client annuity in that space. Now that annuities can change, now annuities become possible. If we had just completely eradicated them from our thinking, we might not even be providing the best advice to our clients.

Hannah: I love that idea of like, are we willing to adapt to give our clients the best service and the best products?

Ian: Which backs in the compensation models, and structures. What we’re talking about, the term compensation structure could mean many things. I think what we’re talking about is, how our clients are paying. Are you paying percentage AUM? Are you paying an annual fee? Or are you paying a monthly subscription? It’s all baked into the cost, because we’ve got to make our margins. You might paying less, but you’re getting less value to Matt’s point earlier, but you’re in the value you need.

Matt: Right, and I think there’s a lot of responsibility on us, the financial planners to know, like you said, what do we want to provide to these clients before we ever start talking about how much we’re going to charge? Or how much our colleagues are charging their clients for what they’re doing? We really, again, infancy of the profession, we don’t have any parameters as to what goes into a financial planner, what goes into investment management. Start with the services, start with how many people you can serve, and then come up with the fee and charge it however you want to.

Ian: Right, exactly, because at the end of the day, it’s an annual number. We’re talking about an annual number. I need to make $10,000 per client because it costs me 6500 bucks per client to keep them on the books. Then, okay, I’ll charge a monthly because it makes everyone feel better, but it’s still the end of the day, it’s the same number. If you can charge 2500 bucks, because your costs are only $950 a client, then that’s a different conversation. You’re still coming into the end goal numbers annual revenue per annual cost.

Hannah: One thing that I appreciate about this conversation is, when I feel like we have compensation conversations, it often falls into fee only. Are you charging commission’s? Fee based, this whole massive conversation around it. I like it how we’re focusing on planning, it’s like there’s lots of different ways to charge for planning. You can be a fee only firm that does no financial planning, like that is absolutely within the realm of possibilities. There are firms that do that.

Ian: They exist.

Hannah: You make a boatload of money, that’s what you do. It’s this idea of, I think some of the conversation has been, we framed the conversation wrong. We’re framing on, how do clients pay us rather than how are we providing financial planning, and then what’s the cost of that? How are we getting compensated for it? I think that how we’ve kind of had this conversation is a conversation that we need to be having. Instead of just, is it better to be fee only versus fee based or commission based? It’s how are you doing financial planning?

Matt: What level of service are you providing to your client?

Hannah: Yes.

Ian: The conversation about fee only versus fee based et cetera to me falls flat when you ask someone, “Can you tell me that fee only equals good advisor?”

Hannah: Amen.

Ian: If that isn’t a one to one, then we have to throw this idea that fee only must be the answer out the window. It has to be.

Matt: You’re right, and I know we’re not the first ones to say this, but if that is true, if everyone believed fee only was the best and everyone went to that model, then how are we saying that we’re good financial planners, if that’s what we were leaning on?

Ian: I think we would all love to coalesce more around the idea of fiduciary, around the idea of regulation in whatever way that makes the most sense. I’m about to say self regulating, but I don’t mean SRO, which is why I’m hesitating. What I mean is, if I see an advisor, acting not in the clients best interest, it should be a collective agreement that that advisor should be in some way reprimanded. I think if we are looking at other professions to review, hey, what are they doing to keep their people in order?

Ian: For lack of a better analogy, I watch a good amount of law and order when I get the opportunity. Then some, every once in a while you see a doctor on the show who reviews and other doctors work, and it’s egregious, and so they report them. The whole medical community would agree with them. Sometimes it’s not so egregious, and they still get reported. The reason is because we have to hold ourselves to that standard. Dick Wagner talks about it in To Think Like A CFP. We have to hold ourselves to a standard that is coalesced around fiduciary.

Ian: I recognize compensation has a huge part of that. If someone has the ability to do nefarious things, eventually it will happen, but that exists in the fee only space. If I tell a client who’s got a million dollars to get a mortgage because it helps my bottom line, and I’m an AUM shop, which I’m not by the way, I don’t know that, that’s actually the right answer. You have to run the numbers. If a mortgage is the right answer, then great. If the mortgage numbers aren’t there, and it’s better for them to pay in cash, you’ve got to take the hit. Right now, there’s no real way for us to govern that.

Hannah: That is a whole other podcast of how do we do regulation around financial planning? Like, can you get audited today? You’re not going to get asked any questions about financial planning. Nobody’s going to ask you, “What are your assumptions that are building in your model?” Nobody’s going to be asking you about like, “What are the theories behind it?” Show your work on these recommendations. It’s, “What are your investments? Do you have your IPS investment policy statement? Where are your client agreements?” That’s the focus and making sure your fees are right. There’s obviously more than that, but it’s not financial planning focused. It’s investment focused.

Hannah: I know with FPA that’s a huge point of a lot of their advocacy work is, how do we change that in a way that that helps and moves the profession forward?

Ian: When you said a third, a third, a third, it felt like really high profit margins. I think that lends itself to the conversation we’re having earlier about margin compression. I would guess that investment managers, profit margins were much larger than 30% 20 years ago.

Hannah: There’s businesses that are being ran today on the 70% margin.

Ian: Right.

Hannah: That’s crazy.

Ian: Right, which is what we’re talking about with margin compression. Where you hear Hannah say 30% is really high, but we’re also talking about a profession where it’s not uncommon to have a 50% profit margin. Clients are demanding more from their typical investment managers, who hold themselves out to be financial planners. You said before, you could be an RAA and do investment management only, it’s completely possible. It certainly is, but again, this is a guess on my part. I would guess their profit margins will come down, because clients will be less willing to pay that high fee for simple, it’s simply investment management.

Matt: Right, and I think that’s where you can end up part of the regulation conversation. Right now you’re holding yourself accountable, whether you’re charging commission, a flat fee, AUM, whatever it is, you’re holding yourself accountable to doing the right thing. There’s really not a ton of checks in place to make sure that you’re actually providing that value.

Hannah: The hard part about this, how do we know if we’re successful doing financial planning? We find out at the end of the plan, and that’s often a long time away. I mean, that’s decades down the road. That’s one of the difficulties with financial planning is, clients don’t know if we’re getting good advice today.

Matt: Well I think a lot of that it goes back to the old guard thing. I was just at a wedding this weekend. When you tell people you’re a financial planner, well my family, friends, it’s someone they trust. They saw something good happen in the past, and that may or may not be good for them. They won’t know until it’s too late, if it is too late. Hopefully everything works out.

Ian: I think the exciting thing for folks who are listening to this podcast is that, the financial planning profession is really young. It leaves open immense amounts of opportunity for you leave your mark on the profession. You’re going to hear conversations about compensation structures, compensation models, subscription versus AUM versus flat fee versus transaction based business. It all comes with its specific connotation.

Ian: I think the most important part for anyone who’s listening who’s earlier in their careers, like me, like Matt, to a lesser extent like Hannah.

Hannah: I’m old.

Ian: Is, to keep your mind open to the possibility of what could happen in the future. Currently, it’s certainly possible that your firm operates within a certain set of constraints, given the way the world is set up today. Like we talked about with annuities, and like we talked about with subscription based models for fees, the world changes. That leaves open a wealth of information for you to pull from and in terms of where you can leave your mark. I think that’s all really exciting.

Ian: While we might be saying one compensation structure is good or another one is bad, I don’t know that either one of those are good or are the right determinant of success.

Matt: Yeah, and I’ll echo Ian a lot on that. I think it’s really exciting that, with the rise of different ways to charge clients, we’re starting to have this conversation. I think like we talked about earlier, let’s start with what our clients need, and what we can provide first. I think that will ultimately be the next step in this conversation. I’m really, really excited to see where this all goes.

Hannah: Always stay curious. What drives me crazy is when I talk to some of these new planners who are very entrenched into one business model, or one way of charging a client, or one way of doing things. As there’re some really brilliant people who are doing exceptional work in every single model that’s out there. If you don’t know them, or you don’t know why they’re doing it that way, go find them. Break out of this isolation, get that larger perspective. Go meet them, ask them more about why they’re doing the things that they’re doing.

Hannah: You’re going to learn more by understanding what other people are doing. You’re going to learn so much more about what you’re going to be doing or want to be doing as well, of why or why not. Broadening that perspective, I think is absolutely critical. Instead of my model is the best, the conversation should, it should be more asking questions and learning more. There’s a lot happening, and it’s going to be changing fast.

Matt: No shameless plug there for like gathering or anything Hannah?

Hannah: Come to next gen gathering this year.

Matt: I find the conferences really valuable, just because people can challenge your ideas. Make you think about other ways of doing things that maybe you didn’t forget to think about, but you just didn’t know about. Sometimes that really helps you create your next best idea or the next best idea.

Ian: I’m a former or recovering fee only zealot. I work for a fee only firm, I still think that it provides opportunity for the least conflicts of interest possible. I would say that now I’m more open minded to other compensation structures, if it means that more people can have access to financial planning. We can in some way still hold ourselves accountable.

Matt: Yeah, and I was honestly in the same way as you about the monthly model, when I first started working in my first RIA. I think a lot of that was because I was 24. There’s no way in hell I could afford a $20,000 financial planning fee, so I just couldn’t resonate with that. I said there had to be a different way, and I was so bought in on that one model. Then when you look at some of the other problems that creates, I finally understand why that advisor wasn’t doing that.

Ian: Right.