How to Serve the Middle Market: Ideas for Planning Approaches and Compensation

Journal of Financial Planning: August 2012 

Betty Meredith, CFA, CFP^®, CRC^®, is InFRE’s director of education and research. Meredith oversees incorporation of research findings and best practices into InFRE’s certification study and professional continuing education programs to help professionals meet the retirement preparedness and income management needs of clients and employees. She has almost 30 years of experience in the financial services industry.

FPA has joined forces with the International Foundation for Retirement Education (InFRE) and the Society of Actuaries (SOA) to explore how the planning industry can do a better job serving Americans regarding their retirement security. The middle market is underserved, and the problem has become worse over the last 10 years, partly because of the shift away from defined benefit pension plans in not only the private sector but the public sector as well. Even those already collecting pensions are not exempt—in May 2012, Ford and GM announced buyout offers to existing pensioners.

At FPA Retreat 2012 in Scottsdale, Arizona, this past May, FPA invited planners working with the mid-market to participate in one of two focus groups digging deeper into the findings of a jointly sponsored survey conducted in March with FPA members. The focus groups were designed to gather ideas about how advisers might do a better job of serving the mid-market, garner ideas for actuaries to improve product design, and identify road blocks to providing the advice needed by this market.

Business Models to Serve the Mid-market

The 16 planners who participated in the focus groups ranged from a planner with a sole focus on the employee benefit market, to a sole practitioner fee-only planner, a practice with 12 staff members who generate over 650 plans a year, and a practice with clients in 22 states.

Overall, the models used by focus group participants were predicated on the following:

• The middle market was generally defined as having between $100,000 and $1 million in investable assets.
• Most of the problems faced by the mid-market have been seen many times before. Mid-market clients don’t need 10 hours of prep or a full financial plan. It’s not that messy. So keep it simple: diagnose, prescribe, and implement (or wash, rinse, and repeat).
• Managing spending is critical to getting on track to build wealth and lifetime financial security, because credit card debt and spending more than consumers can afford is a common issue.
• Costs of working with the mid-market can be driven down by requiring data be submitted electronically by the client or using software that collects and aggregates online data. How this is enforced depends on the age of the client—younger clients are more comfortable entering personal financial information online.
• Volume is necessary to be profitable. One planner took on 10 new clients a month, or 100 a year, when first starting in this space.

Compensation models to serve this market currently being implemented included:

1. Hourly As Needed. No retainer and therefore no client expectation of monitoring. In the mid-market it is important to not have open-ended hourly fees, as clients are price-sensitive. One planner requires a deposit of 50 percent of the expected planning fee up to $500 in advance, and refers out to others who can implement with product.
2. Flat Fee. Clients pay $600 for a three-hour, face-to-face financial checkup that includes 45 minutes of outside work. Clients submit three major questions and provide supporting documentation ahead of time. Clients like the fixed or known cost. From there the planner provides choices on how they are hired: hourly, commission, financial checkup, or retainer on assets under management (AUM).
3. Commission-Only. For clients with above average income and no assets, cash flow can be rearranged by decreasing tax withholding and reducing debt payments so funds can be re-channeled into savings and needed insurance products.
4. Hybrid. Anything above $250,000 is billed as a percentage of AUM. Less than $250,000 in assets is paid for by sale of commission products. Some form of a financial plan is done for every client, even if it’s a one-page report that spells out when they can afford to retire and how to boost duration of retirement assets.
5. Good, Better, Best Service Levels. One planner segments client charges into three, first-year planning brackets, where subsequent years are 60 percent of the first year’s fee. Another provides five planning service levels (like Medigap policies) where additional services can be added onto the base service plan. For example, Plan A covers foundational planning, Plan B adds more services, and Plan C adds investment management.
6. Monthly Recurring Fee. Like gym or other memberships, a fixed-fee recurring payment program is set up. Once 40 or so people are enrolled in this system, a younger planner can be hired to take over those clients. No minimum asset level is required.

Planning Approaches Taken

Some planners seek to help mid-market clients’ overall situation, whereas others focus on addressing single issues.

1. Focus on Efficiency Approach. Efficiency is critical to profitably serving the mid-market. Establishing repeatable processes so things don’t get dropped allows lower-level employees to provide the bulk of the service details. For one planner, a staff of 12 can create full plans and can provide 650 reviews a year because support staff does the prep before and processing after meetings.
   
   All data is on a platform that can be viewed by the individual and the adviser. Money Guide Pro, Juncture, and other products now aggregate online data to decrease the cost of data gathering. Clients are shown how to enter data. For example, in a meeting on 401(k) asset allocation, the reallocation is done together during the meeting rather than revisited and implemented later.
   
   The employer market is also a very efficient vehicle for reaching the middle market as retirement assets and employee benefits are homogeneous.
   
   In sum, the mid-market needs streamlined, disciplined processes where clients input data and/or where account aggregation tools work well. When data gathering is automated, a plan can be quickly produced electronically. The role and value of the adviser then is not in creation of the physical plan but rather in helping clients take the action steps needed.
2. Cash Flow Management Approach. In order to grow their future businesses, many planners take people on as clients when the client has good income but no wealth. They’ve seen those clients stay with them over time.
   
   The mid-market is more about cash flow management and less about wealth management. Rearranging the cash flow appropriately builds wealth. People came to one planner with a government paycheck and benefits but no cash. They found the more comprehensive their approach the better the assets grew and wealth accumulated. They reviewed risk management, life insurance, long-term care, property and casualty … all the risks that can derail a financial or retirement plan.
   
   Getting people on a path that includes savings is very important. Changing tax withholding and helping clients reduce debt allows them to put more money into savings.
   
   This approach focuses on key aspects of the mid-market: housing, cash flow and risk management, guardianship for kids, how to pick 401(k) investments, quarterly rebalancing. One planner starts with an upfront plan that clients buy separately and then they receive six to eight hours of planning help every year thereafter. If investable assets are less than $100,000, they are placed into an asset allocation fund. For the planner, this approach breaks even or loses a little the first year.
3. Modular Planning Approach. Most mid-market clients aren’t seeking a full financial plan, they want an answer to a specific pain point or problem. The modular approach creates a replicable system that can then be individualized. Processes for common types of clients must be set up ahead of time, and clients are slotted into an appropriate process.
   
   One planner felt the compliance required in the broker-dealer world derailed the adaptation of the planning process necessary for working with the mid-market, when at times the full process wasn’t needed. He believes advisers are not as restricted and are more able to do what is needed, when needed.
   
   One planner had three distinct planning seasons or rhythms: tax returns are prepared, goals are set, and every third year the investment policy statement and estate plan are updated. Another provided a menu of services that are “one-off” projects, or different service packages with a fixed price list. While some individuals come back for more service, there is no continuing service until there is a new engagement.
4. Flat Recurring Fee with Client Data Entry Approach. As mentioned in the flat fee model above, one planner offers clients a $600 flat fee minimum retainer for a three-hour meeting to address up to three issues. This is a special engagement, and the planner expects to spend an additional hour or two preparing for the meeting. Another version of this was a first-year fee level that depends on complexity of situation and a fee of about one-third that amount is paid in subsequent years.
   
   One planner uses a separate, streamlined process by developing a plan in year one, and then charging a monthly fee thereafter with the client entering updated data. Their firm’s newer planners are focused on handling this book of business.
   
   Another planner uses an organized process to tailor needs to targeted segments such as the military. The client enters the data, and the service package includes focus on spending and managing spending, insurance, learning to save, and debt management. Highly automated tools and special services such as banking and debt management are used. Commissions are earned on insurance sales.

Next Steps

All industries as they mature develop efficiencies that substantially increase the quality and decrease the cost of providing their product or service to the mass market (such as automobiles, computers, and cataract surgery, to name a few). We have arrived at the time in our industry to develop efficiencies and define retirement income strategies that serve the mid-market.