Kitces, Lockshin discuss estate planning and fees

The wealth management industry’s traditional fee model is blocking more financial advisors from providing valuable tax and estate planning services to clients, according to Steve Lockshin.

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While the veteran planner and entrepreneur stressed in an interview that “I rant about this often” and that the problem has persisted for years, he argued that the industry is still in the “early days” of integrating estate planning into advisors’ service menus. As a co-founder of estate planning technology firm Vanilla (among other tech ventures), a principal of the Mariner Wealth Advisors-owned AdvicePeriod and an outspoken critic of conflicts of interest, Lockshin brings a lengthy resume and potent perspective to compensation questions.

“When you are compensated on assets under management, your primary focus is assets under management,” Lockshin said, suggesting that it would be different if more advisors charged specific fees for tax and estate work on behalf of their clients. “Because there’s no financial incentive, most people don’t focus on it.”

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Fee myths and realities

His “mission” with Vanilla — which has received investments from Vanguard, Edward Jones Ventures, Nationwide and Allianz, along with other stakeholders — is to help advisors by making it “easier to do a job they should do,” Lockshin said. He brought up the example of a high-income client killed in a car crash with no estate plan whose spouse may need to not only take their children out of private school and reenter the workforce but also engage in a lengthy, costly probate court dispute that could leave the family’s wealth diminished and in limbo.

“There is nothing worse than dealing with a survivor of an early death,” Lockshin added. “It is just a nightmare, and it is so preventable. But, because advisors are not compensated for it, they just ignore it.”

In a Vanilla webinar last month, Lockshin and fellow entrepreneur Michael Kitces provided an accompanying practical business case for that moral framing with a frank discussion about the importance of estate planning to advisor productivity and attracting high net worth clients. 

Asked by moderator Kennary Macwan, Vanilla’s senior brand marketing manager, to “set the stage” by sharing what he believes the industry is getting wrong, Kitces responded that “this entire conversation of fee compression is a myth.” The median fee of 1% of assets under management “hasn’t moved one iota in decades,” he said. What has shifted, though, is technology, which now enables many tasks to be more efficient, opening more time for other services.

“I think the client has a greatly enriched value proposition, which means, from a firm’s end, you don’t get to just, like, sit back and keep charging the same 1% fee, not changing anything,” Kitces said. “The pressure is on us to keep value-adding our way up, to make sure we continue to bring the value that it takes to earn the fees that we earn.”

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Eating at a different table

Against that backdrop, Macwan then asked Lockshin to discuss the table stakes for advisors today. He said the answer can revolve around whether advisors work with high net worth clients or not, but “a basic estate plan” represents a “fundamental” obligation to clients. 

“Get them in the right portfolio, make sure it’s on target to hit their objectives while they’re building their, let’s call it, retirement egg, make sure they’ve got the protection in place with insurance in the event of a catastrophe,” Lockshin said. “And everything beyond that — tax planning, the soft stuff, the other services — are all bonuses. In my business, where we cater to ultra-affluent, I think those are table stakes, but at the low end, or, I should say, the people who don’t have what’s called taxable estates, those are pluses.”

To highlight the connection, Kitces went on to discuss his research suggesting that certified financial planners who engage in a holistic planning process generate about 40% higher revenue and income than their peers. What “the conventional industry view” misses, though, stems from the assumption that the gains come from boosting client headcounts, he said.

“I don’t go from 100 clients who have a million dollars to 200 clients who have a million dollars,” Kitces said. “I go from 100 clients who have a million dollars to 50 clients who have $5 or $10 or $20 million, and I watch my fees and revenue productivity skyrocket because I’m doing fewer clients. But if I want to earn that, I need deeper expertise. I need to get in front of larger clients. I need to have meaningful ideas and planning strategies to put in front of them, to talk about, in order to engage them and show value for clients that are at that dollar level.”

And that gets into estate planning that “could save you seven figures, eight figures, nine figures, or 10 figures of wealth,” he continued. “There’s a whole tier of value-add that doesn’t even get opened up until you get to people that have taxable estates, and, suddenly, when you do, it’s like, yeah, who really cares if I save you a couple of basis points on your portfolio? I’m going to save you like 30% or 40% of your gross net worth with this estate-tax strategy.”

READ MORE: Advisors clamor for estate planning tools as attorneys wave red flags

The tech is there. What about the fees?

The knowledge and resources necessary to add services in areas such as trusts, along with the possible compliance concerns, explain why some estimates suggest fewer than half of advisors do any type of tax planning. Fintech competitors riding a wave of investments from some of the biggest names in wealth management are giving advisors plenty of options to choose from in seeking to bulk up their estate planning and alter their fees to reflect the value of that service.

Vanilla’s software helps advisors bring client data into one place to map out the impact of various strategies, compile the necessary documentation and prepare for catastrophic scenarios, Lockshin said in the interview. But, in his opinion as the founder of several big registered investment advisory firms and wealth tech companies, reliance on the AUM fee prevents advisors from adding estate planning services.

“Its really more of a mind shift and, unfortunately, it’s going to take consumers demanding this change,” he said. “Advisors are very, very uncomfortable charging another fee or a flat fee, because they have already internalized how to charge assets under management.”