We need a new model for financial planning
Published in · 6 min read · Jun 11, 2020
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There is a sad and ironic truth about the financial services industry; people who are in most needs of professional financial advice are the least likely to get it.
The problem lies in how financial advisors get paid which provides them every incentive to work with rich clients and to ignore regular people. I’ll explain why that is and what new business models the financial services industry should adopt to better serve more people.
The importance of having a financial plan
Having a financial plan is very important. Charles Schwab conducted a survey of the financial behaviors of people who work with a financial planner compared to those who don’t.
The results for people who work with a financial planner are encouraging.
- 75% pay their bills and still have enough to save money each month.
- Two out of three have an emergency fund.
- 62% have life insurance
- 38% live paycheck to paycheck.
The results for those who do not work with a financial planner are alarming.
- 33% pay their bills and still have enough to save money each month.
- Less than one out of four have an emergency fund.
- 39% have life insurance.
- 68% live paycheck to paycheck.
Working with a financial planner to develop and execute a written financial plan leads to considerably better results.
There is just one problem.
Financial Advisors have no incentive to work with you unless you’re rich
The traditional model for how a financial advisor gets paid is determined by the amount of “Assets Under Management” (AUM) their clients have. Under this model, financial advisors don’t get paid directly by their clients. Instead, they take a percentage of the investments they manage on behalf of their clients. It’s not uncommon for advisors to charge 1%-2% of the value of your assets each year.
