We applaud the points raised by Mark Hurley in his recent article “The Overhyped Move To Subscription Fees.” He is right. A subscription model is overhyped. But we would respectfully add that it is only overhyped by those who have not carefully considered how the subscription model is deployed and its function within the continuum of wealth management services that all investors need to reach financial independence. In short, subscription-based financial planning is not overhyped, but rather incorrectly hyped.
The authority behind this assertion comes from our own practice, WMGNA, where we have offered subscription-based financial planning since 1995. From this experience, we know two things. Subscription-based financial planning is wildly misunderstood and second, the AUM model is so entrenched, that it will never go away. It may evolve, but we’ll touch on that later.
For now, let’s examine why, despite AUM’s ubiquity, it is a flawed model for a vast number of investors. The reason for this is simple. Younger savers from post-college to older savers age 55 years old or more have not accumulated enough savings for the AUM model to serve them well. According to the latest Changes In Family Finances Federal Reserve report, 80% of U. S. households have a median net worth of $307,000 or less. The median net worth of savers ages 45 to 54—prime retirement savings years—is about $247,000. Finally, among all renters, the median net worth was just $10,000.
It's fair to say from these numbers that the wealth management industry charging 1% for assets under management is underserving 80% of the U.S. population. Even at the top tier of net worth—$307,000—a fee of 1% is going to produce revenue for the wealth advisor of just $3,100, and we would question the value of advice clients would get under this regime.
From 35,000 feet this is extremely short-sighted too. Where will the next generation of $2 million plus accounts come from? Worse, almost the entire wealth management industry is fighting for the business of just 20% of the market. And here, the massive marketing budgets of large wire houses make the life of truly independent advisors very difficult. As a data point, in 2023, Morgan Stanley spent $898 million on marketing.
But if the AUM model doesn’t serve large swaths of the market, how does a subscription approach serve them? Here’s just one example. The largest expense for savers are taxes. A poorly executed or non-existent tax strategy will sap thousands of potential savings that could be channeled into investments that compound over time. The delta is staggering.
Under an AUM model, the large wire houses often give tax planning lip service. We mean this in the literal not pejorative sense. Wealth advisors can talk about taxes, but they can’t proactively help their clients with it. Subscription-based advisors, if properly set up can however.
We call the tax return the Rosetta Stone of an individual’s financial life. From it, their entire financial picture can be discovered and planned for. For instance, a tax return can tell you whether or not a client needs and or is ready for tax-deferred savings. If they are, that’s one strategy, and if they are not, it’s another. But the investor is not going to get the right advice on which strategy is right for them without a careful review of, and the correct inferences drawn from the tax return.
There are myriad other events where a subscription model can take a closer look and give the client careful, relevant advice. These include inheritances, buying a first house, determining the number of deductions, financing major purchases, setting up a will and choosing the level and type of life insurance coverage that is right for the saver’s family. Well-meaning as they may be, a wire house wealth advisor cannot, and likely will not dive into these issues.
And yes, within this specialized advice, there is also plain vanilla asset allocation, and the fees for this are based on AUM. Even in our shop, where we are laser-focused on subscriptions, AUM fees still deliver a good portion of our revenues. And this is one reason we say the AUM model will never go away. Even under a completely different service model, AUM fees are still in there.
We think Mr. Hurley is spot on when he notes in his article that “wealth managers instead are going to go up the value curve, providing additional services.” But we also believe that that wire houses and large RIAs are unlikely to eat into their margins by offering a basket of new services to clients simply because they want to beef up their value proposition. For some, it’s because margins are tight as it is. For others, it’s because they don’t have to yet.
A look at Schwab’s income statement in this regard is instructive. For 2023, of Schwab’s $18.3 billion in revenue, $9.4 billion came from net interest. Of this amount, $4.8 billion came from margin loans. During 2023, asset management and administrative fees were also $4.8 billion. Under a scenario such as this, it’s imaginable that ancillary services, such as those under a subscription model, could be offered. But for RIAs where their assets under management have not reached the point where incremental business has a 90% plus margin, offering ancillary services would require a bold, and perhaps financially painful decision.
Finally, we sometimes chuckle at the chatter that subscription-based financial services are the next paradigm that is going to dispatch the AUM model to the dustbin of history. They are not. There will always be a place for them, and maybe someday a dominant place. Rather than wholesale replacement, we simply see subscription-based services as another entry along the continuum of wealth management services.
At the moment, it has a rather small place. We think it should be larger and we think it will become larger for two reasons. First, clients with significant assets may come to see they are not getting commensurate value for the fees they are paying, especially when the majority of their assets are placed into low-cost index funds. They will demand something more. Second, subscription-based services will become more prevalent because they must. The wealth management industry is obliged to lift those on the lower tiers of wealth higher up on the ladder because absent a new source of growth, there may not be any growth at all.
Daniel J. Friedman is a founding partner and CEO of WMGNA LLC Tax-Out Financial Solutions, a firm that employs a tax-out approach to financial planning. Brian P. Beck, CPWA, is a founding partner, president and CFO of WMGNA LLC.