Three things advice-only financial planners get wrong when starting out

Advice-only financial planning can be a rewarding way for financial planners to serve clients on their terms, but those setting out can find it challenging to build a practice and establish a steady income.

“If you’re a financial professional, it’s easier to make money on the assets under management,” says Julia Chung, chief executive officer and certified financial planner at Vancouver-based Spring Planning Inc.

That’s because once an advisor builds their client base to a certain size, they get regular income, she says.

With advice-only planning, income depends on output. “It’s hours for dollars, and it’s a tougher slog,” Ms. Chung says.

And because the business model is less common, “a lot of people are recreating the wheel, starting from scratch, trying to figure out how to do that,” she adds.

Here are three common challenges for advice-only financial planners.

1. Undervaluing and undercharging for services

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Ms. Chung says that some advice-only financial planners are up against their altruism. They underprice their services substantially, which leads to an unsustainable business model and can cause them to give up the practice altogether.

Ms. Chung calls this a psychological challenge that comes with running a business. “We often set our price lower because we don’t value our work very highly,” she says.

Some people may look at the comparative cost of an advisor charging 2 per cent on a portfolio every year and view an upfront advice-only fee as too high.

Some financial planners may be drawn to help clients who typically can’t access financial planning expertise and charge what those clients can afford, Ms. Chung says. That might mean charging $1,500 but giving $5,000 worth of value. “It just becomes this massive disconnect,” she says.

She advises those starting out to think about the amount of income they want to make, and then consider the costs of running a company, such as attracting clients and creating and managing systems.

For example, a financial planner who made $100,000 annually working with a financial institution would need to bring in a higher gross amount to get close to that salary with an advice-only model.

2. Separating the business from client work

Andrea Thompson, founder and certified financial planner at Modern Cents in Toronto, says she struggled initially to separate running the business from client work. Her motivation for going the advice-only route was helping and serving clients.

“I didn’t give a ton of thought to how much work it would be to run the business part of it,” she says. “That learning curve was quite extensive, and I’m still learning.”

Ms. Thompson says the business component goes well beyond finding and serving clients. Financial planners must become savvy bookkeepers, marketers, tech departments and more.

The key, she says, is embracing trial and error and “being prepared for things not to work out and for that to be okay.” For example, She’s played with a few different customer relationship management tools, including designing her own, to figure out what works.

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She’s also learned to segment tasks to get the most of her time. For instance, she doesn’t do client meetings on Monday mornings or Fridays so she can focus on work she’s not able to tend to when busy with clients the rest of the week.

“Segmenting is hard to do, but crucial if you’re trying to ensure you give enough time to the things that, as you grow as a practice, seem less important relative to meeting with clients,” she says.

3. Building a customer pipeline

Jason Heath, managing director of Objective Financial Partners Inc. in Markham, Ont., says the transactional nature of client work was one of his biggest challenges. While advice-only financial planners have recurring customers, they need to have a lot of volume to be successful, which can make the first few years difficult.

Clients may seek support more sporadically, so financial planners need more prospects because the income may not necessarily be there from the same client every year, he says.

Mr. Heath, who’s had a media presence for 20 years, says that’s helped attract new clients, but the best source of qualified prospects is networking with other professionals and developing good referral sources.

Those referrals can come from clients, accountants and other professionals in the financial services industry. For example, independent portfolio managers who don’t provide financial planning find Mr. Heath a safe and friendly referral option, he says, as he’s not going to steal their business.

One mistake Mr. Heath made early in his career was meeting with other professionals who were looking to him for clients rather than a mutually beneficial referral relationship.

“Just be mindful to try to build the right referral sources and know there’s a lot of people out there networking with you who just want you to send them business,” he says.

It can be tough to determine who the right referral sources are, but he recommends being clear about financial planning work and why it’s different as many people still don’t fully understand financial planning.

“To a lot of people, financial planning is investing and earning a great rate of return, which is just a tiny part of what true financial planning is,” he says.