The Elephant in the Room: Fees and Gen X/Y

I’m sorry I missed John and Raef’s Fees at a Crossroads webinar – my invite must have gotten lost in the mail (not that I’m bitter about it). But if I had been there, I would have used my 26 years of millennial wisdom to answer some of your great fee questions related to Gen X/Y. But because SOMEONE forgot about me, I’ll just have to do it here. (Alright, enough about me; I’m starting to reinforce the narcissistic millennial stereotype.)

In all seriousness, even though millennials get a bad rap, they are doing something really astounding to this industry – they’re forcing change. That’s because advisors serving these younger clients are having to come up with different service and fee models to meet their needs. What you’ll notice in between a lot of the Raef and John banter is that those advisors targeting Gen X/Y are at the forefront of the fee movement. They’re the early adopters. Even if you’re not ready to take the leap to move to these new and different fee structures, I do challenge you to observe and learn from these guys.

Alright, onto my millennial wisdom…

Q1: The X/Y Planning fee model ($1k upfront + $150/mo + 100bps) seems awfully high, relative to a young client’s net worth. Any thoughts on how to “feel good” about actually implementing that?

MP: It’s the age-old question – how do you quantify the value you provide to substantiate your fees? Many advisors are still trying to figure this out. You can see it by the way the industry has transformed from commissions, to AUM, to planning, to retainer-based fee models . The argument we’re making is that you should charge where you believe you truly add value.

XYPlanning advisors, they feel they add value from both a planning and asset management standpoint:

  • $1,000 upfront fee – for the hours of planning that goes into analyzing a client to develop a plan
  • $150 per month retainer fee – for ongoing guidance to implement and stick to the plan
  • 100 bps AUM based fee – for investment expertise and guidance during times of volatility
  • Let’s address the elephant in the room. Charging clients additional fees on top of the 100 bps seems controversial, especially when dealing with small clients with less wealth. However, consider the challenges in trying to remain profitable when serving this demographic. They present a ton of planning needs and not a lot of opportunity for asset management. They’re faced with financial hardships (like student loans), while simultaneously experiencing major financial life events (marriage, kids, home-buying). Because of this and their age, they haven’t had a lot of time to develop investable assets.

    So advisors are forced to roll up their sleeves and be very hands-on, something that’s rewarding but also time-consuming. If you think of the more typical clientele (a boomer or pre-retiree), of course advisors are heavily involved in retirement planning – but a huge component of that is asset management.

    So here’s my take on why this works:

  • $1,000 upfront fee – helpful when dealing with younger clients who have a lot of planning needs, but who are still skeptical of financial advisors. They might decide to take that initial plan & implement it with limited or no help from you, which would leave you with the sunk planning costs.
  • $150 per month retainer fee – necessary when this type of client goes through significant life events and changes that will greatly alter the course of their financial plan. You should be paid for your consulting on key decisions and changes to their plan.
  • 100 bps AUM based fee – even IF the client does have assets to manage, the size of that asset base will be very small, so that 100 bps charge will also be very small. For all the hands-on planning you’re doing, this fee on its own would certainly not cover the costs of serving this client.
  • Although I do recommend this general structure when working with younger clientele, these numbers are just examples. If your firm outsources your asset management and doesn’t feel that’s where you add value, then perhaps you charge less than 100 bps. We’ve seen some advisors use outsourced or robo-advisor solutions with clients and only charge 50–75 bps for ongoing guidance.

    Q2: I respectfully suggest people making 50k per year will not pay $150 per month for advice.

    MP: It wasn’t really a question, but I loved this comment and wanted to take the opportunity to address it for everyone thinking the same thing. In short, I agree to a certain extent. While I do think a younger prospect making $50,000 a year would pay for advice, you may find it difficult getting them to commit to $150 per month ($1,800 per year) for planning fees without first demonstrating real value. To do that, I highly recommend two things:

    1. Freemiums – free advice or resources that are easy to access.

    These require some time to put together but they’re leverageable over the long term. For example:

  • Blog posts with guidance on specific, relevant issues – things like what to do after having a baby (establish a will, set-up a 529 plan, etc.)
  • Downloadable template or guide – Maybe a budgeting worksheet
  • Free e-book with easy-to-follow advice just for your niche – for example this could be a book for young doctors on how to dig yourself out of debt to get your finances back on track
  • 2. “Non-committal planning” – unbundled or partial planning services.

    Some great examples of ways to charge for planning in a way that feels less intimidating to the prospect:

  • One-time consultation – Like a quick start session , where prospects get a 90-minute web-conference session to get the answers to their top financial questions
  • One-time event – Like a brunch-&-budget , where prospects register and come to the event with questions, and leave with tactical to-dos
  • Even after implementing these types of recommendations, you may still find yourself playing the long game, waiting until the moment the prospects realize they can no longer manage their finances on their own. However, at least the next time they’re ready to seek out professional advice, they’ll think of you. Why? Because the services above demonstrate that you’re a valuable, trusted resource.

    About those HENRYs

    The subset of the Gen X/Y demographic that Raef chose to focus on in his Fees at a Crossroad webinar was the HENRYs (High Earning, Not Rich Yet) – A term I first used in an earlier blog post that Raef stole (again, not that I’m bitter). This group is a little different than the $50,000 wage earner from Question 2 above. HENRYs are career-driven millennials who earn over $100,000 per year. They still don’t have a lot of investable assets (other than their 401(k) or IRA), but they are on the pathway to looking a lot like your current pre-retiree/boomer clients. So you might look at this group to find a niche that’s worth going after. Their discretionary income combined with the go-getter mentality might make them more receptive to the idea that financial advice is worth paying for, especially if you use those tactics I suggested above.

    Just the tip of the Iceberg

    We only scratched the surface here, but remember that we’re still at the beginning of this fee movement. We’ll be sure to share more insights as we uncover them, especially when it comes to early adopters!

    XY Planning is not affiliated with SEI or its affiliates.