Financial Planning as a New Frontier

For the past 50 years, the concept of retirement maintained a hegemonic hold on the world of work. The career path went something like this: work hard, save a portion of your earnings, buy a home, pay your child’s college tuition, work a bit more, save some more, and retire in your sixties, preferably somewhere with lots of sun.

But the nature of work and its value system has transformed. Life expectancy is on the rise, and traditional fallbacks such as pension plans and social security have become less reliable. As a result, the rosy picture of retirement no longer holds true for most.

Without a clear goal for retirement, people are turning to distinct, individual goals to help guide their financial decisions. Achieving early financial independence, sending kids to college, home ownership, longer vacations from work – all are now viewed as separate goals in and of themselves rather than just steps towards retirement.

Moreover, unprecedented levels of flexibility in work and the fluidity of capital mean that the very notion of a steady, upwardly mobile career is less within reach. All these dynamic conditions have influenced the way we perceive the value of work and money. If those perceptions have changed, then the tools to manage financial futures should evolve as well.

We believe there is a mismatch between conventional modes of financial planning and the capabilities of financial planning tools. While so much of personal finance has evolved, we believe the gaps in real financial planning support are driving the next generation to actively seek out new solutions. We suspect it will do more than inspire better software; it could well reframe all of wealth management.

Demystification of Financial Planning

If you were to strike up a conversation with someone at a party, chances are they regularly rely on Venmo, Zelle, Robinhood, Betterment, or one of the many personal finance platforms that have become popular within the last decade. In fact, nearly 80% of millennials report using digital platforms [Source]. Financial services, like payments, banking, and investments, have undergone a watershed process of demystification.

Frictionless mobile payments, digital deposits, and direct access to equity markets, largely at zero cost, are now the norm, empowering consumers in ways that would have been unimaginable at the turn of the millennium. In this new state of play, financial activity is cheap, gamified, and increasingly self-directed. That is still not the case with financial planning.

Despite the swell of tech innovation and the simplification of personal financial management, most elements of financial planning remain confusing and opaque. At its core, financial planning is fundamentally difficult, requiring complex cost-benefit analysis. Consider, for example, savings vehicles.

• How much should you contribute to your 401k?
• Should you even select a 401k, or is a Roth account or simple IRA better for your situation? Each of these vehicles differs in tax treatments, investment opportunities, and employer contributions. Health insurance and medical benefits are similarly complex.
• What health plan makes sense?
• How do you maximize the value of your HSA or FSA?
• Many cost-effective tools exist to direct your portfolio, but what guides how much of your savings you keep liquid?
• What’s the ideal schedule to pay off your debt?
• As you approach retirement, how do you think about transforming investments into income?

The point we want to make here is simple: optimizing your personal finances is not an easy task. The fragmented personal finance solutions that do exist confine themselves to discrete activities. None go far enough in presenting a holistic image of your financial health, and none offer much-needed clarity around how one financial decision may have ripple effects.

These solutions, in other words, are stuck in a framework defined largely by outdated general-purpose financial goals. In an environment where flexible, individualized financial objectives are the norm, users need to have a complete picture of their financial profile.

Flexible Work

The traditional 9-to-5 office job is fading away. More and more skilled professionals are choosing independent, flexible work instead of decades-long careers at one company. While freelancing as a proportion of the US workforce has remained relatively constant (hovering at approximately 36%), the number of freelancers continues to grow at a healthy clip among skilled workers. As of 2021, 51% of workers with post-graduate degrees were freelancers, up 6% from 2020 [SOURCE]. And more professionals report they are considering flexible work opportunities, with 56% of non-freelancers saying they’ll likely turn to freelancing in the future.

From a work/life balance perspective, this is good news. However, the flexibility to choose when to work also introduces new challenges. In addition to solving the problem of opacity, there is also an urgent need for scenario modeling that better aligns with the realities of digital work. Driven by varied sources of income, freelancers lack the stability that comes with an anchor employer and required tenure to achieve 401k matching, health care benefits, and tax withholding. Freelancers are on their own, and as part-time and remote/freelance opportunities expand, reflecting the related variability and risk will be essential.

Retiring Retirement

It is a non-obvious conclusion that retirement is no longer the north star.

The 19th-century concept was originally tied to pulling the less able-bodied out of physical work; today, the service economy captures 79% of US workers and demands a lot less physical labor as requirements to even go to an office recede. Older Americans can stay employed, and many do – 20% of freelancers in ’21 were over 65. [Source] Life expectancy is longer, and many see work as a way to stay engaged; some of the dominance of senior leisure communities is giving way to live/work communities for the “modern elder.”

For those who want to retire, we are only now really feeling the impact of the receding pension system, which went from covering 60% of Americans to 10% from 1980 to today. 22% of current retirees are still funding retirement with pensions [source], and the majority are primarily funding retirement through Social Security benefits that were only ever meant to support other savings. We won’t dive into all the challenges of the 401k alternative, especially for an increasingly mobile workforce, but we will highlight that in one AARP survey, only 17% believed they wouldn’t need to work beyond retirement age. [source]

It is not surprising then that movements toward financial independence are gaining traction over retirement planning or that near-term goals are getting more attention.

Basically, our point is this – navigating personal finance is hard. But flexible work structures and appetites for very different financial goals make it a lot harder. You can easily and cheaply transact money and manage investments, but opacity and paperwork still dominate debt management.

What could the solutions look like? DTC

We do have to wonder whether this is a space that - near-term - can be entirely turned over to software. The landscape has seen an influx of DTC players emerging and leaning into broader financial planning and support. Some have incorporated advisors, essentially becoming a tech-backed RIA; others are attempting to bypass advisors altogether to offer even cheaper wealth management.

We’d argue that today, pure software solutions can’t adequately address idiosyncrasies and constantly shifting financial profiles. The coming generation may look at low cost robos as wealth management, but the gap is precisely the capabilities we cite above as being increasingly necessary – real financial planning and adaptability to complex mid-term goals.

Robos are a nice response to fee pressure on basic investment management, but they do no real tax or broader asset strategy. AI could certainly help; it could infuse narrative into financial choices and offer more interaction on specific questions, but planning is rarely a clear optimization equation, and we’d argue consumers are less often seeking direct answers than they are seeking perspective and some human validation of their decisions.

More meaningfully, at the moment, there is limited appetite to turn over financial decisions to a language model that periodically hallucinates in an industry closely scrutinized by regulators, so we’re still likely to see more basic guidance and portfolios for a while yet.

Basically, if consumer preferences are shifting as we believe, it would be hard for an all-software play to fill that need.

From the Advisor

Many an article has been written on the mismatch of the advisor model to the generations currently inheriting wealth. In fact, it’s estimated that 70% of women and Millennial/Gen Z investors will likely fire their family’s advisors as trillions in wealth transfers come their way. [Source] Despite the rumors of the RIA’s death, the accurate picture is closer to a category in crisis than one in decline.

The median firm saw a 5% CAGR on client count, and net asset flows, i.e., growth outside of market fluctuation, were low but positive. [Source] Advisory models are certainly under threat from the commoditization of trade execution and portfolio direction, as well as the growing self-direction of potential clients of all income levels.

While the proportion of affluent investors who are advisor-reliant grew from 37% to 42% from 2015 to 2021, the proportion maintaining self-management accounts doubled from 35% to 69%. (Source). Today, this increasing appetite for more active management and oversight across age levels (source) is not spelling an end to the advisory space, but it is creating enormous pressure for an expansion of advisors' services beyond portfolio management.

It is a shift that makes sense. In an earlier evolution, we leaned on brokers for market access, working with wirehouses that were literally wired to put orders into exchanges. As reliance on that reduced and churned accounts highlighted a rough incentive structure, we saw the 90’s alignment to wrap accounts and the AUM fee. Independent practices of CFPs without motivation to push a brokerage’s own products seemed to mean incentives were aligned.

Today, we are seeing cracks in that alignment – RIA’s benefit from portfolio growth but have limited incentive to divert cash to pay down debt or improve broader financial health. Planning for any specific client goals can conflict with growing assets. Increasing amounts of held-away / self-managed assets also create added frustration for both sides.

While the AUM model still dominates, we’ve seen related shifts in compensation models that align to a different orientation, rewarding investment management less and holistic planning more. Admittedly, some movement to flat fees was really dictated by the appetite to draw HENRYs (“high earners not rich yet”) who would get early advice for flat payments but be expected to graduate to an AUM model. There are entire RIAs, however, that have migrated to exclusively flat payments. About 45% of advisors offer some fixed fees, with 30% offering hourly. [source]

Arguably, there is a version of the advisory model that would be well-positioned to meet shifting consumer preferences, and an adaptation is already underway.

This is a place in which AI could shine – as support to the existing advisor model. Building a profitable model in this category is hard. There are high costs for customer acquisition, and while historically, the retention profile has been strong, the coming generation comes with a more critical perspective on fees vs. value alongside a variety of assets already living outside their advisor’s purview. Scaling human advisors to serve more clients is key, and AI can be key to doing it as an advisor’s sidekick. This improvement in margins could be precisely what drives more firms to expand offerings with fixed fee-based models.

The Happy Medium

In the end, we envision the emergence of new tooling and financial planning solutions, not as replacements but as complements to existing human advisory services. These could manifest first as a new tech-first RIA or as a modernized version of traditional groups.

We envision advisors supporting their clients on the full range of decisions and activities that tie into long-term planning; they could connect debt obligations to personal cash flow and projected earnings or integrate them into credit card liabilities. They could tie billing cycles to payroll cycles or help determine the right credit card for a given moment in the client’s lifecycle. They could advise on the best mortgage or bank account the client should open.

An advisor armed with algorithmic tooling could help translate their client’s goals into everything from run-of-the-mill purchases to alternative assets and provide them with a bird’s eye view of their financial footing.

All that said, there are real challenges to this future-proofed RIA. Among them: software stacks that are limited and not particularly malleable. Also, financial planning tools with a historically narrow view of planning that don’t infuse the spending and personal balance sheet data we consider essential for a real solution.

Finally, shifts away from AUM models face increased regulatory scrutiny and a variety of billing challenges.

How do we get there?

We've observed a distinct difference in the financial profile of the Millennial generation relative to their parents, characterized by a more flexible income base and much less fixed end goal. Given the strides made in empowering consumers in areas like investments, banking, and payments, it seems only fitting that these advancements should also simplify the often-confusing task of financial planning. It’s clear to us that the advisory industry is an adaptable creature already pivoting in this direction.

But while these may feel like minor changes – leaning into financial planning more, plugging in more of a client’s spending habits, etc. – there is something more fundamental afoot. Michael Kitces summarizes it nicely:

“Notably as the advisor business model changes, I think some of the anchor platforms will also change. Most of our platforms today are built around where the money is, where the assets are, and as we go from wealth tech to advisor tech, as we go from asset gathering and product distribution into the advice business for the sake of advice, I wonder if the future of advisors is getting paid for advice and not necessarily managing assets. What is your business company’s purpose in the future of the advisor landscape?”

While we have a line of sight to what is coming, we also see the enormous gaps in getting there, and we wonder how many advisors have an answer to Michael’s question. In the next post, we’ll dive into the structural challenges on this path and how we suspect they find resolution.

If you and your team are developing a product in this space and want to dive deeper into this topic, don't hesitate to get in touch. You can reach Yelena at info@jumpcap.com for a chat and robust discussion.