XY Planning Network experiences the pains of rapid growth

Membership is growing by leaps and bounds

Sep 26, 2018 @ 10:08 am

By Jeff Benjamin

The XY Planning Network kicked off its annual conference in St. Louis this week with a benchmarking study showing that its members, like many of their clients, often face sharp learning curves.

While it would be difficult to dispute the innovation and success so far of XY Planning's model aimed at recruiting advisers committed to serving younger clients, a closer look exposes some challenges for newcomers to the network.

In 2017, for example, advisers who had been members of XYPN for two years or more averaged 38% revenue growth. Members with less than two years with the organization averaged revenue declines of nearly 7%, which was a reflection of breakaway advisers losing revenue from prior brokerage-related business.

Michael Kitces, co-founder of XYPN along with Alan Moore, attributes some of that revenue-growth disparity to the challenges advisers face when they start running their own business, along with the more puzzling problem of underpricing for advisory services.

"Our members tend to charge lower fees," Mr. Kitces said. "We find that everybody underpriced their services in the first few years. But after three years everyone raised fees."

While Mr. Kitces said the median planning fee for all XYPN members is in line with the industry averages of $2,200 per year, he expressed frustration that advisers joining XYPN often feel they need to charge lower fees when starting out on their own.

The benchmarking study showed that in their first year with XYPN, 26% of advisers raised their fees and 4% lowered fees, while 70% did not change their fees. In years two and three, 81.5% raised fees and 18.5% left fees unchanged. Beyond three years, every adviser raised fees.

"We are now talking to advisers about fees, and we tell them whatever fee they think is comfortable, they should raise it by 50%," Mr. Moore said.

Mr. Kitces added, "A lot of members won't take that advice."

XYPN members must provide adviser services on a fee-only basis, which includes offering planning services on a monthly basis. But Mr. Kitces said that once advisers grow their businesses, and client account sizes get larger, there is a migration toward asset-based pricing for some clients.

What's interesting about the pattern of initially underpricing advisory services is that even though XYPN members are targeting younger clients, the advisers are not necessarily newcomers to the industry.

On average, XYPN advisers are in their 30s with 10 years' worth of industry experience, Mr. Moore said. While members' ages range from 25 to 69, the median age is 38.

"Everyone here is a product of a failed succession plan," he joked, suggesting that the growth of XYPN is directly related to the dearth of functioning succession plans across the broader planning industry.

While XYPN's membership is growing at a steady clip, the study shows that average annual revenue growth across all of its advisers has been falling as the unique adviser support network expands.

Average revenue growth per adviser last year was 12%, down from 15% in 2016, and 40% in 2015. Mr. Kitces said that was a result of growth off a smaller revenue base.

Advisers who have been with XYPN for more than three years saw average annual revenue growth of 57% last year, 55% in 2016 and 29% in 2015.

Over that same period the membership has grown to 750 advisers, a 50% increase from 500 last year. XYPN finished its inaugural year in 2014 with 49 members.

The ever-optimistic XYPN co-founders aren't ignoring the trends in front of them, but they are putting them in the context of XYPN's being a relatively young organization.

"Most members who join us are already experienced in the industry, just not experienced in running their own business," Mr. Kitces said.

Mr. Moore and Mr. Kitces don't hesitate to talk about their expectations for growing XYPN to 10,000 members over the next 20 years.

Their secret weapon, according to Mr. Moore, is the niche market of next-generation clients, who often have more debt than assets but are willing to pay for financial planning advice.

"Historically, an adviser's niche was proximity to his office, but we see niche businesses of all kinds growing faster and gaining scale," he said. "Niche firms will continue to siphon off clients with niche needs, and then you're just left with generalist advisers. And if you can't compete on value as a generalist, you have no choice but to compete on price."

That's still a long way from 10,000 advisers, and XYPN is probably too small to turn a lot of heads at any major independent broker-dealers or mega registered investment advisory firms. It is averaging 25 new members a month despite acknowledged branding issues.

Mr. Moore admitted that the business side of XYPN needs to address the misnomer that XYPN is only for younger advisers. He also acknowledged the future challenge of an organization named after two younger generations that will eventually be the equivalent of today's baby boomers, while the niche continues to be younger clients.

But XYPN current appeal for advisers joining remains and is likely due to the simplicity of the model.

Members are required to sign a fiduciary oath, offer clients a monthly planning service, target next-generation clients and have a clean regulatory record.

The monthly subscription fee starts at $409 and allows advisers to leave with their clients at anytime.

"We run the same fee structure with our advisers that we ask them to run with their clients," Mr. Moore said.

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