In the world of financial advising, the term Assets Under Management (AUM) often takes center stage. Many advisory firms operate on a model that heavily focuses on increasing AUM, which directly impacts their revenue. However, this narrow focus on investable assets might overlook significant aspects of a client’s financial health and skew the outcomes of the advice provided. Let’s dive into why an AUM-centric model can be limiting and how a more holistic approach can better serve clients.
The Limitations of an AUM-Focused Model
- Narrow Focus on Investable Assets:
- AUM typically includes investable assets like stocks, bonds, and mutual funds. However, this represents only a small fraction of a client’s total wealth. Other significant assets such as property, pensions, business assets, collectibles, commodities, DIY-run assets, and overseas investments are often ignored.
- Ignoring Human Capital:
- Human capital, the present value of future earnings determined by an individual’s productivity and health, is a crucial part of one’s financial landscape. An AUM-focused approach may neglect this vital aspect, leading to an incomplete financial strategy.
- Potential for Skewed Outcomes:
- When the primary goal is to increase AUM, advisers might be incentivised to focus on strategies that boost investable assets, potentially at the expense of comprehensive financial planning. This can result in neglecting other important areas of a client’s financial life.
Negative Impacts of an AUM-Centric Approach
- Incomplete Financial Planning:
- Overemphasising AUM can lead to a lack of attention to essential aspects such as estate planning, tax efficiency, debt management, and risk management.
- Client Mistrust:
- Clients might perceive that advisers are more interested in managing their investable assets rather than providing holistic advice. This perception can erode trust and satisfaction.
- Misaligned Incentives:
- Advisers might prioritise investments that increase AUM over those that are truly in the client’s best interest, leading to potential conflicts of interest.
Embracing a Holistic Approach to Financial Advising
To ensure all aspects of a client’s financial situation are addressed, advisory firms should adopt a more holistic and client-centered approach. Here are some strategies to achieve this:
- Comprehensive Wealth Management:
- Include all types of assets in the financial planning process, such as property, pensions, business assets, and more. This approach provides a complete view of the client’s financial picture.
- Human Capital Consideration:
- Develop strategies that incorporate human capital, focusing on career planning, education, health, and other factors that impact future earnings.
- Fee-Based or Flat-Fee Models:
- Consider adopting fee-based or flat-fee models that charge for the advice and services provided, rather than relying solely on AUM. This aligns the adviser’s incentives with the client’s best interests.
- Regular Comprehensive Reviews:
- Conduct regular reviews that cover all aspects of a client’s financial life, ensuring that the advice provided is aligned with their overall goals and not just their investable assets.
- Transparency and Communication:
- Maintain clear communication about the value of the services provided, ensuring clients understand how each aspect of their financial plan contributes to their overall well-being.
Conclusion
While AUM can be a useful metric for assessing a firm’s growth and stability, it should not be the sole focus. A truly client-centered approach involves looking at the bigger picture, considering all aspects of a client’s financial life, and providing comprehensive advice that goes beyond just managing investable assets. By doing so, advisers can deliver more value, build stronger relationships, and achieve better outcomes for their clients.
Ultimately, the goal should be to provide holistic financial planning that enhances the overall financial health and well-being of clients, ensuring that all services are delivered effectively and with their best interests at heart. By embracing this approach, financial advisers can help clients achieve their goals, build trust, and foster long-term success.
A Perspective on Korrynn Baltzersen’s Article: Rethinking the AUM-Centric Model
Korrynn Baltzersen’s FT Adviser article, “Five Ways Advice Firms Can Future Proof Their Business Model,” provides valuable insights into how financial advisory firms can adapt to the ongoing “Great Wealth Transfer.” Baltzersen emphasises the importance of capturing fresh Assets Under Management (AUM) to remain competitive and successful. While the strategies outlined are undoubtedly useful, there’s an opportunity to expand the discussion towards a more holistic approach to financial advising. Let’s explore how integrating the principles from “Rethinking the AUM-Centric Model: A Holistic Approach to Financial Advising” can provide a more comprehensive and client-centric perspective.
Embracing Comprehensive Wealth Management
Baltzersen’s recommendations focus on personalising services, creating engaging thought leadership, providing DIY research tools, investing in digital capabilities, and ensuring competitive pricing. These are all essential steps, but they largely revolve around the goal of increasing AUM. To truly future-proof their business models, advice firms should consider the broader spectrum of a client’s financial life.
1. Broadening Asset Considerations: While AUM is crucial, it represents just a fraction of a client’s total wealth. Financial advisers should include all types of assets—property, pensions, business assets, collectibles, commodities, DIY-run assets, and overseas investments—in their planning. This comprehensive view ensures that clients receive advice that covers their entire financial landscape.
2. Recognising Human Capital: Human capital, or the present value of future earnings, is a significant yet often overlooked component of financial planning. Advisers should incorporate strategies that enhance clients’ career prospects, health longevity, and productivity. This holistic approach acknowledges the importance of future earnings and personal development in overall financial health.
Aligning Fee Models with Client Interests
Baltzersen points out the need for advisers to justify their pricing strategies, especially to younger generations accustomed to low or no fees. While competitive pricing is important, so is the alignment of incentives between advisers and clients.
3. Fee-Based or Flat-Fee Models: Adopting fee-based or flat-fee models can ensure that advisers’ incentives are aligned with clients’ best interests. By charging for the breadth of services provided rather than solely focusing on AUM, advisers can deliver more balanced and client-focused advice.
4. Transparent Value Communication: Maintaining clear communication about the value of the services provided is crucial. Clients should understand how each aspect of their financial plan contributes to their overall well-being, fostering trust and satisfaction.
Enhancing Client Engagement and Outcomes
Baltzersen’s emphasis on digital engagement and thought leadership is spot-on, particularly in today’s increasingly digital world. However, ensuring that these efforts translate into meaningful client outcomes is equally important.
5. Regular Comprehensive Reviews: Conducting regular reviews that cover all aspects of a client’s financial life helps ensure that advice remains aligned with their evolving goals. This practice not only enhances client engagement but also demonstrates a commitment to their long-term success.
6. Empowering Clients with Knowledge: Interactive tools and educational initiatives are invaluable. By empowering clients with knowledge through workshops, webinars, and personalised consultations, advisers can build more informed and confident clients who appreciate and value the advice they receive.
Conclusion
Korrynn Baltzersen’s article provides a solid foundation for advice firms looking to adapt to changing market dynamics. By integrating a more holistic approach, as discussed in “Rethinking the AUM-Centric Model: A Holistic Approach to Financial Advising,” firms can deliver greater value and foster stronger, more trusting relationships with their clients.
Ultimately, the goal should be to enhance the overall financial health and well-being of clients, ensuring that all services are delivered effectively and with their best interests at heart. By doing so, financial advisers can achieve sustainable business growth and client satisfaction in an increasingly complex financial landscape.
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