Given the centrality of advice in the work of financial advisors, it’s ironic how peripheral advice has been in the economics of advice providers.
Before the adoption of the so-called Merrill Lynch rule, effectively in 1999 but officially since 2005, providing advice was considered incidental to providing brokerage services. But two decades of price competition had eroded the profitability of commissions, so Wall Street pushed for a change in regulation that would allow broker/dealers to charge fees (without having to become registered investment advisers—note the “e,” not the “o.”) The rule shifted the economic driver of the business from generating transactions to gathering assets, much like that of RIAs. Of course, being like an RIA but not an RIA further fuzzed the already fuzzy line between registered reps and RIAs, and created decades of hemming, hawing and lobbying—and the mind-numbing Best Interest rule—that placates the big banks (which want to be advisors AND advisers when it suits them) but still leaves investors guessing whether those they turn to for advice are acting as advisors or advisers, if they know enough to question what’s going on.
With the broker/dealer world and the RIA world now providing advice that is paid for by asset management fees, is there an economically viable place for advisors who provide fee-based financial and investment advice exclusively and who don’t manage assets? Many planning-oriented advisors who are members of the National Association of Personal Financial Advisors or of the XY Planning Network certainly fall into that category. Still, other members of those organizations also manage investments and charge AUM fees.
There is a less well-known group of advisors who just provide advice, and aptly enough, its name is the Advice-Only Network. Morningstar’s Christine Benz and Amy Arnott recently discussed the group in a podcast with the group’s founder, Eric Simonson, who is also CEO of Abundo Wealth, an advice-only financial planning firm he founded in 2019 after serving as a financial advisor with Ameriprise Financial. Much of the podcast focused on the appeal of the advice-only approach to younger people who are willing to pay for advice, but who prefer to manage investing themselves or who don’t yet have the level of assets that would attract advisors who base their fees on AUM.
If they knew an advice-only model existed, I believe that many about-to-be retirees and those in retirement might prefer that approach to help with particular retirement-related questions, such as when to claim Social Security, how Medicare works and all sorts of RMD and withdrawal questions. Eric was kind enough to agree to speak with me about my assumption and other issues. Our conversation, edited for brevity and clarity, follows.
Evan: Eric, let’s start with the idea that those in their 50s and early 60s might find the advice-only model appealing.
Eric: That’s what we’re finding. While we work with everybody, and plenty of people in their 20s and 30s, our fastest-growing segment of new clients is those in their early 50s through early 60s. These are people at a stage in life when they need a lot of advice and when they have the largest amount of investable assets they’ve ever had. Every kind of advisor wants to grab them, but many people do not want to pay the typical 1% fee. With a firm like ours, which charges a monthly subscription fee, they find they can get the advice they want at a fraction of the cost, and they don’t have to be worried about being sold something they don’t want or need. We can advise them on their 401(k) plan choices, help them roll over the plans to an IRA at a low-cost provider like Fidelity, Schwab or Vanguard, and then help them create diversified, low-cost portfolios using index funds and ETFs.
Evan: How do advice-only firms differ from fee-only planners who typically provide comprehensive financial plans?
Eric: I think that the idea of giving somebody a financial plan is archaic. For some advisors, doing a financial plan is just a promotional tool to sell a product. But even when it’s not that, life changes too fast, and anything can happen that would make a plan you got a week ago irrelevant. We would rather work with people, show them how they’re tracking toward their goals, and regularly help them adapt to changing circumstances. We also give them assignments, like asking them to review the beneficiaries for all their accounts and holding them accountable to make sure they get that done by the next time we meet. Very often, another issue will come up by then—maybe, whether they should fix their old car or buy a new one—and we move on to that.
Evan: How do prospective clients find you?
Eric: We’re fortunate that we’ve received press attention, but most of our business comes from client referrals.
Evan: Let’s talk about advice-only as a business. It seems like you’re doing a lot of work for a lot less money than advisors who charge an AUM fee, which seems great from the client’s perspective but maybe less so from the advisor-as-entrepreneur point of view.
Eric: There are a couple of ways to look at it. First, somebody who is deciding to go advice-only probably will make less money, but they are actively choosing a more ethical and honest approach to the profession of financial advice. At the same time, advice-only is still an attractive business model. We have a recurring revenue stream that’s consistent and profitable, and I don’t see any reason why that wouldn’t be a very attractive business for somebody to buy. To put it in perspective, the average financial planner brings on maybe six or seven clients a year. We’ve added approximately 350 households so far this year, and we’ll probably bring on a total of around 700. We also advise on over $1 billion in assets.
Evan: That may change some minds. Any other misconceptions?
Eric : Probably the biggest one is that we’re just for young do-it-yourselfers who are good with technology. For one, we have many older clients who are better with technology than our younger clients. Second, not all our clients are do-it-yourselfers. There are incredible numbers of people who want to be empowered to understand what’s going on in their financial lives, how they should be investing and why they’re investing. They’re looking for help with lots of things; all they need is a tiny bit of handholding, and they will happily learn.
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