“If I was buying a house and was offered the option of paying an up-front commission on the house or paying 1% of the house’s appraised value for the entire time I lived in the house, I think I might opt for the former.”

As you can guess, the analogy was not greeted warmly by the AUM advocates. But I wanted to advance the idea that one day compensation tied to AUM would come under question just as commissions were at that time. It was just a matter of time before the consumer advocates would turn their searchlights toward the 1% “golden calf.” That time is now upon us.

To quote Bob Veres once again, “AUM is just commission in drag.”

To take the home-buying analogy one step further, it seems that today’s tenants have another option: association fees. Instead of paying up front or paying a percentage in perpetuity, we can simply pay an appropriate association fee commensurate with the services received. This seems quite reasonable for those who desire the services but don’t have the assets to satisfy the asset limits. This model will work for extending the financial planning profession to the masses until the “association fees” themselves become onerous.

Subscription fees for service are the latest trend—and the discussion about them is just getting warmed up. Schwab, through its Intelligent Portfolios, is beginning to prove the point by delivering the service via subscription fees. So is the XY Planning Network with its efforts to help planners build a subscription-based business.

Blueprint For The Future
If I told you I knew of an advisor whose firm was charging his clients just under 5% of their income for a life-focused financial planning service, and that his client list had grown from 0 to 5,000 in 12 years—in a country of 230 million people where less than 2% (approximately 5 million people) make more than $10,000 per year, I’m pretty sure you’d think I was making up this story. But this is, in fact, the story of André Novaes and LifeFP in São Paulo, Brazil. He told me he would define the middle class of Brazil as those making $12,000 to $13,000 a year.

How does he do it? Simple. He actually bets the prospective client that his firm can prove its worth in three months and offers a money-back guarantee. And then his firm goes about the tightly orchestrated process of changing lives with wise and proper financial decisions (note that I didn’t say changing portfolio values).

As Novaes told us at Back2Y, “Caring for humans is at the center of the proposition’’ for his business, something communicated by its process and people. He is straightforward and factual in his assessment of how the model works, the take-up rates, the attrition rates, etc. The beauty of the model is that its weighted value has nothing to do with investible assets, amount of assets or rate of return on assets. It has everything to do with helping people use their money wisely, educating clients, and helping them get the best out of life with their money. Today, LifeFP has 62 planners serving its clientele.

While advisors in America are trying to hang on to 1% AUM fees with newfound value justifications, LifeFP is charging clients almost 5% of their incomes, and they are gladly paying it for one simple reason: The value is real and felt daily because it is a life-centered value proposition, not an asset-centered proposition.

Novaes reminds me of a prophetic voice crying out in the financial wilderness and calling the profession to examine itself before judgment falls in earnest. You’ll be hearing more of him in the years to come, and you’ll see this model echoed around you sooner rather than later.