There is more conversation than ever around alternative fee models thanks to fee compression and an industry-wide hunt for younger clients, sources say. But when it comes to subscription fee models, RIAs are divided on their viability.
“Have we looked at a subscription-based model? Yes, but it’s a stupid model,” says Ken Fisher, founder, executive chairman, and co-chief investment officer of Fisher Investments.
Using a subscription fee model creates the problem of “aiming a stupid model at moneyless clients. It’s better to follow the money and not the fad of the day,” Fisher insists. “And this one is a fad. Subscription fee-based models work great for advisors who want to stay tiny and accomplish very little,” he adds.
Schwab recently announced that its robo-advice offering, Schwab Intelligent Portfolios Premium, was adopting a $30 monthly subscription fee model with an up-front fee of $300. And while Chris Cordaro, partner and chief investment officer of $3.1 billion RIA RegentAtlantic, says he’s interested in subscription fee models, he claims Schwab’s model won’t work. He questions how traditional RIAs can implement subscription fees effectively.
“The problem with the Schwab model is that it reminds me of a gym membership,” he says. “My gym is really crowded in the first two weeks of January and then it empties out,” he says. “Schwab is banking on more people signing up. And they are counting on people to call for service, but their call levels will be very low.”
And when that happens, says Cordaro, critical tax and financial planning will fall to the bottom.
Despite Cordaro’s doubts, he says RegentAtlantic is currently researching its own subscription fee model. The firm’s management just isn’t sure how to implement it correctly yet.
“Right now, our firm is built as if we were an airline only offering business class. We need to think about more choices for the people who do not want or need that level of service,” he says. But Cordaro wonders, “How do I limit the services I’m offering clients not paying at the regular level? I don’t know how we could limit the service offerings to reflect the dip in cost.”
Other RIAs are asking themselves the same question.
“The financial planning and RIA space has always poorly served younger investors, because until someone has a lot of assets there is not an effective way to charge them,” Michael Silver, CEO of $603 million RIA Baron Silver Stevens, says. “But by ignoring younger clients, advisors are motivating them to manage their own investments” and missing out on their potential business, he says.
The question of “What do you do with someone that’s earning a lot but hasn’t accumulated any wealth yet?” persists, Silver says. RIAs need to know the subscription model is profitable before implementing it, Silver maintains. And right now, his firm has questions such as, “Do we charge a flat dollar-per-month fee or do we derive the cost based on a percentage of annual income or net worth?”
Michael Kitces, co-founder of XY Planning Network, says high net worth and ultra-high net worth advisors should steer clear of subscription fee models. And he implies Silver and Cordaro may be asking the wrong questions altogether.
"We have created over 900 subscription fee models for advice firms at the XY Planning Network," Kitces says. And whether a firm should use subscription fees “depends on the nature of its existing business,” he says.
“Large advisory firms tend to work with the most affluent clients. And it’s going to be hard for them to run a successful subscription fee model. It would be like a Mercedes manufacturer going into the scooter business,” Kitces says. Both are good businesses, but the unfamiliarity will make it difficult to succeed, he explains.
Kitces also calls to question the idea RIAs can use subscription models to effectively win younger clients.
“I don’t think subscription models are good for HNW or UHNW firms that aren’t built to advise lower asset clients,” he says. “Millennials are not dumb,” and they won’t be adding to your business, he says. “If you are a HNW or UHNW advisor, go get more HNW and UHNW clients who need those services.”
When asked for comment on Schwab’s subscription model, a company spokesperson directed FA-IQ to its marketing materials, in which Cynthia Loh, vice president of digital advice and innovation, maintains that “subscription-based pricing is second nature to people who pay for other forms of ongoing access and guidance, like streaming media services and fitness memberships.” People “should have the opportunity to pay for financial advice the same way.”