Financial advisers often set thresholds for investable assets, which can exclude those who need financial planning the most. This practice is driven by commercial viability and the traditional training and certification of advisers, which primarily focus on managing existing wealth. However, a shift in mindset is necessary to address the broader needs of society, particularly for those lacking significant financial resources. This article aims to challenge and expand the conventional view of financial planning.
The Commercial Reality
Financial advisers typically set asset thresholds to ensure profitability and operational efficiency. The predominant fee structures, whether based on a percentage of assets under management (AUM) or flat fees, favour clients with substantial investable assets. Advisers’ costs, including compliance, research, and administration, remain largely fixed, making smaller portfolios less attractive. Consequently, advisers prioritise clients who generate higher revenue, often leading to the exclusion of those without significant financial assets.
The Gap in Adviser Training
Traditional financial adviser training and certifications, such as those provided by the Chartered Insurance Institute (CII) or the Chartered Institute for Securities & Investment (CISI), focus on managing and growing existing wealth. The curriculum emphasises investment strategies, tax planning, retirement planning, and estate management, primarily for clients who already possess significant financial resources.
However, this approach overlooks a crucial aspect of financial well-being: the creation of wealth. Advisers are generally not trained to help clients identify and leverage their productive assets, often referred to as human capital. Human capital encompasses intangibles such as reputation, character, connections, skills, and knowledge. It represents the present value of future earnings and is a critical component in achieving financial security and a comfortable standard of living.
The Need for Holistic Financial Planning
Arguably, those without substantial financial assets are in greater need of financial planning. Their well-being is often more adversely affected by a lack of financial resources, and they would benefit significantly from professional guidance on how to build and manage their wealth. Yet, the current financial planning industry tends to turn these individuals away, focusing instead on those who already have money to invest.
I am not referring to setting up regular savings plans or advocating for a frugal lifestyle. I am focusing on increasing actual earnings and guiding clients on strategies to grow their income exponentially.
Embracing Human Capital Management
To truly democratise financial planning, advisers must expand their focus to include human capital management. This involves helping clients identify their unique strengths and opportunities, leveraging entrepreneurial ventures, and transforming their potential into sustainable livelihoods. By viewing clients’ skills, knowledge, and connections as bond-like assets that can be converted into equity-like assets, advisers can help create exponential wealth growth.
Implementing a New Paradigm
Financial planning should not be solely about intermediation over asset thresholds. Instead, it should be holistic, inclusive, and geared towards helping everyone, especially those most in need. This requires a fundamental shift in how financial advisers are trained and how they perceive their role.
1. Curriculum Reform: Training programmes and certifications should include modules on human capital management, entrepreneurial opportunity, and sustainable livelihood creation. This will equip advisers with the knowledge and skills to assist clients in wealth creation, not just wealth management.
2. Fee Structure Innovation: Advisers should explore alternative fee structures that allow them to work with clients across the financial spectrum. This could include performance-based fees, subscription models, or project-based pricing that ties advisers’ compensation to clients’ financial success.
3. Mindset Shift: Advisers need to adopt a mindset that values long-term relationships and the holistic well-being of clients over immediate profitability. This involves recognising the potential in every client and committing to helping them achieve financial independence and security.
Conclusion
Total wealth is human capital plus financial capital. Financial planning should be accessible to everyone, regardless of their current financial capital situation. By expanding their focus to include human capital management and adopting innovative fee structures, financial advisers can play a pivotal role in helping a broader range of clients achieve financial well-being. It’s time for the industry to rethink its approach and embrace a more inclusive, holistic model of financial planning that addresses the needs of those most in need of professional guidance.
Reference: In 2007, CFA Institute Research Foundation published Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance by Roger Ibbotson, Moshe Milevsky, Peng Chen, and Kevin Zhu (hereafter IMCZ).
Thresholds: The Traditional Approach
Financial advisers often set thresholds for investable assets before they consider a prospect suitable for investment advice for several reasons. Here are the key factors influencing this practice:
1. Business Model and Profitability
- Fee Structures: Many advisers charge fees based on a percentage of assets under management (AUM). This model means larger portfolios generate more revenue. For example, an adviser charging 1% on a £1 million portfolio earns £10,000 annually, while a £100,000 portfolio only generates £1,000.
- Fixed Costs: The costs of providing advice (e.g., research, compliance, and administration) are relatively fixed, regardless of portfolio size. Smaller portfolios may not cover these costs adequately, making them less profitable.
2. Client Segmentation and Service Levels
- Service Tiers: Advisers often segment clients into tiers based on asset levels, offering more personalised and comprehensive services to higher-tier clients. This segmentation ensures that the adviser can allocate resources effectively and maintain service quality.
- Value Proposition: High-net-worth clients often require more complex and personalised financial planning services (e.g., estate planning, tax strategies). Advisers focus on clients who can benefit most from their expertise.
3. Regulatory and Compliance Requirements
- Regulatory Burden: Advisers must comply with extensive regulations, which involves significant time and resources. Higher asset thresholds help ensure that the revenue from clients justifies the compliance costs.
- Fiduciary Duty: As fiduciaries, advisers are obligated to act in their clients’ best interests. Advisers may set asset thresholds to ensure they can provide the level of service necessary to fulfill this duty effectively.
4. Operational Efficiency
- Scalability: Managing larger portfolios can be more efficient. Advisers can leverage economies of scale, making it more practical to serve clients with substantial assets.
- Resource Allocation: Setting thresholds allows advisers to focus their time and expertise on fewer clients, enhancing the quality of advice and ensuring each client receives adequate attention.
5. Market Positioning and Branding
- Target Market: Advisers may establish thresholds to position themselves in the market as specialists in serving affluent clients. This positioning can attract a specific client demographic and differentiate them from competitors.
- Reputation and Referrals: Serving high-net-worth clients can enhance an adviser’s reputation, leading to more referrals and opportunities within that market segment.
6. Client Outcomes and Satisfaction
- Investment Complexity: High-net-worth clients often have more complex financial situations that benefit from professional management. Advisers aim to ensure they can deliver meaningful results and satisfaction.
- Comprehensive Planning: Advisers are better positioned to provide comprehensive financial planning, including retirement, tax, and estate planning, for clients with significant assets.
Summary
Financial advisers set investable asset thresholds to ensure profitability, manage operational efficiency, comply with regulatory requirements, and provide high-quality service tailored to the needs of their target market. This approach helps advisers maintain a sustainable business model while delivering effective financial planning and investment advice to clients who can benefit most.
Rethinking Financial Planning: From Asset Management to Human Capital Development
Q&A
Q1: Why do financial advisers set thresholds for investable assets before taking on clients?
A1: Financial advisers set thresholds for several reasons. Primarily, these thresholds ensure profitability, as advisers often charge fees based on a percentage of assets under management (AUM). Larger portfolios generate more revenue and better cover fixed costs such as compliance, research, and administration. This practice also allows advisers to focus on clients who can benefit most from their expertise and resources.
Q2: How does traditional financial adviser training fall short in serving those without significant financial assets?
A2: Traditional financial adviser training, including certifications from bodies like the Chartered Insurance Institute (CII) and the Chartered Institute for Securities & Investment (CISI), focuses on managing and growing existing wealth. This includes investment strategies, tax planning, retirement planning, and estate management. However, it largely overlooks how to help clients create wealth from scratch, an area where those without significant assets could benefit most.
Q3: What is human capital, and why is it important in financial planning?
A3: Human capital refers to the intangible assets individuals possess, such as their reputation, character, connections, skills, and knowledge. It represents the present value of future earnings. In financial planning, leveraging human capital involves helping clients identify and utilise these assets to create sustainable livelihoods and build wealth. This approach is especially crucial for those without substantial financial assets, as it can provide a path to financial security and growth.
Q4: How can financial advisers help clients leverage their human capital?
A4: Financial advisers can help clients leverage their human capital by identifying their unique strengths and opportunities, guiding them in entrepreneurial ventures, and transforming their potential into sustainable livelihoods. This might include career coaching, skills development, networking strategies, and personalised financial advice that aligns with their goals and capabilities.
Q5: What changes are needed in the financial planning industry to better serve a broader range of clients?
A5: The financial planning industry needs several changes to serve a broader range of clients effectively:
- Curriculum Reform: Incorporate modules on human capital management, entrepreneurial opportunities, and sustainable livelihood creation into adviser training programmes.
- Innovative Fee Structures: Create alternative fee models, including performance-based fees, subscription plans, or project-based pricing, to cater to clients with diverse financial needs. Additionally, offer one-to-many masterclasses that provide generic financial planning advice.
- Mindset Shift: Advisers need to adopt a long-term, holistic view of financial planning that prioritises clients’ overall well-being and potential for growth, regardless of their current asset levels.
Q6: How can financial advisers balance profitability with the need to serve those without substantial assets?
A6: Financial advisers can balance profitability with inclusivity by adopting innovative business models and fee structures that allow them to serve clients across the financial spectrum. For instance, performance-based fees or subscription models can align advisers’ compensation with clients’ success. Additionally, leveraging technology for scalable solutions, such as online financial planning tools and resources, can help advisers reach and support a broader audience cost-effectively.
Q7: What is the ultimate goal of rethinking financial planning to include human capital management?
A7: The ultimate goal is to democratise financial planning, making it accessible and beneficial to everyone, especially those who need it most. By focusing on human capital management, advisers can help clients build wealth from the ground up, ensuring a comfortable standard of living and financial security throughout their lives. This approach not only supports individual well-being but also contributes to broader societal prosperity by empowering more people to achieve financial independence.
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