Updated Mar 13, 2020

Financial Planning Represents an Increasingly Important Role

Research conducted by Financial Planning shows that in 2017, fee-based revenue overtook commission-based revenue for the first time. There is a myriad of factors driving this change, including industry regulation, the stability of a fee-based revenue model, and investors’ desire for holistic advice. As investment firms embrace a fee-based “advisory business” model, financial planning represents an increasingly important role within a financial institution’s investment program. This article explores the main advantages that financial planning offers investment firms and ways to increase adoption.

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Few Americans Have a Financial Plan

Recent research by Fidelity shows that only 18% of Americans have a written financial retirement plan in place. The reasons for this astoundingly low percentage vary from overconfidence to a lack of financial literacy. Other respondents stated that they don’t know where to begin with their financial planning. Regardless of the causes, these research findings show the growth potential.

Longer-Lasting Client Relationships

In light of the robo-advisor trend and a nearly limitless amount of investment information at our fingertips, investors may question the importance of working with an investment firm. Holistic financial advice can turn these potential threats into opportunities. A holistic approach to financial planning is not a one and done transaction; instead, it focuses on the multiple aspects of the client’s financial health and goals, which help firms differentiate their services and remain competitive. The result is stronger and longer-lasting relationships with clients, which translates into predictable and sustainable revenue.

Increase in Household Assets

A report by Kehrer Bielan Research and Consulting observed that household assets tend to flow towards the source of the household’s financial plan. The typical US household keeps 59% of its savings and investments in a bank or credit union. However, if the household obtained a financial plan where they bank, that institution holds 63% of the household’s financial assets. Additionally, the vast majority of these households consider the source that prepared the financial plan as their primary financial institution. These insights further illustrate the potential impact of financial planning’s ability to deepen client relationships.

Ways to Increase Adoption

Yet, despite these benefits, investment firms in financial institutions struggle to embrace financial planning and lag behind their counterparts in the financial services industry. Consider the following guidelines to help your firm overcome this challenge.

1. Setting and Managing Expectations

One of the main reasons institutional-based advisors have been slow to adopt financial planning is the time and effort required in creating a financial plan. Similar to the shift from commission-based to a fee-based model, financial planning may seem like taking a step backward in order to take two steps forward. Less revenue is generated at the onset compared to more transactional revenue opportunities, but over time they will see higher revenue.

2. Impact on Advisor Production

New research from Kehrer Bielan Research and Consulting, commissioned by Raymond James Financial, examines the relationship between financial planning and an advisor’s production. Their analysis shows that for the typical advisor, output increases by 3% when completing two plans a month versus one plan. However, advisors who complete two to four plans a month have an average gross dealer commission that is 132% higher than advisors completing one to two plans per month. 

3. Quality Matters Too

Many firms design compensation plans with goals for their advisors to complete a number of financial plans. Incorporating the completion of financial plans as a special incentive is nothing new. However, focus on the quality of financial plans as well as setting goals to ensure plans are regularly updated. Institutional-based advisors and their management need to recognize that financial planning is a dynamic and ongoing process – rather than a static plan that is never revisited once completed. After all, financial planning is a service, not a product.

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