Navigating regulatory challenges in subscription services

Navigating regulatory challenges in subscription services
Offering subscription-based services can bring in additional revenue, but advisors must also keep state and federal regulators' compliance expectations in mind.
FEB 04, 2025
By 

At the broad-brush level, adding subscription services to wealth advisory practices is easy to understand. And it’s good for everybody. For advisors, subscriptions add revenue without cannibalizing AUM fees. For investors, it provides access to services that may be mission-critical on their path to financial success and independence. 

As with many things in this business, simplicity stops where regulatory compliance begins. Adding subscription services to your practice is no different. 

Ensuring compliance with SEC regulations falls into three buckets: 1) the subscription agreement; 2) termination clauses and 3) compliance with state securities regulations where you do business. 

The interplay between state and federal regulators is murky for RIAs. Thirty-seven states incorporate federal regulations wholesale by reference. The 13 who don’t – which interestingly do not self-identify – have very specific ideas concerning the conduct of RIAs offering subscription services. 

Getting the menu right

The nib of the subscription agreement, as it relates to regulators, often focuses on the financial plan. Generally, regulators contend, “Wait, for years, you included financial planning in your 1 percent AUM fee. Now you are going to charge for it?”

The regulators have a point, and the antidote is to expand the menu of services offered as part of a financial plan. This is the jumping-off point for advisors considering subscriptions: you must be committed to providing the services. 

Offering services like tax planning, real estate and insurance services need not be an Everest-like challenge to pass regulatory muster or to be effective for your clients. Absent in-house experience in any given area, you need a cadre of trusted professionals that you can count on to refer work to when it arises. Whether you get paid for the work you refer is beside the point. While you may be able to arrange a referral fee, we advise against it. The point is, the subscription gets clients access to the expert service they need, and you quarterback the effort so the outcome is incorporated into the financial plan you are executing for them.  

Typical subscription services include: 
•    Tax planning
•    Tax preparation
•    Tax approximation
•    Family Guarantees and Multi-Generational planning
•    Long-Term Incentive Compensation 
•    Real estate and auto purchase and financing
•    Cashflow analysis and management 
•    Employee benefit advisory

In our practice, tax is the centerpiece, even though we are not accountants, and we do not prepare returns ourselves. We maintain strong relationships with accountants we trust, and we are very much in the flow of how the tax strategy and execution impact the client’s plan. 

We do this because we fundamentally believe tax management is the most important factor in the financial well-being of our clients. Wealth advisors in wirehouses are not wholly detached from the tax aspects of their clients’ finances, but are not in the center of it either. Often, their compliance department limits what their advisors can say and do with respect to tax. This works for them but, in our view, is not optimal for the client. 

Saying goodbye

Regulators closely scrutinize how you handle clients who cancel mid-subscription. It happens. To keep regulators happy, you need to provide detailed disclosures on how departures are managed. 

In situations where the client pays their subscription upfront, say, $4,500, what happens when they leave mid-year? Do they get all their money back, some of it, and if the latter, as a pro-rata amount, or some other formula? Was some or all the work done and how does this impact the amount of the fee they get back?

No single approach is deemed appropriate or inappropriate per se, but the disclosure needs to be made in the subscription agreement, so the client knows or can know exactly what happens if they decide to leave. Regarding the very notion of subscriptions, the financial services industry is reaping the bad behavior of telephone carriers and health clubs who have used subscriptions in abusive ways. 

It's perhaps worth noting that a subscription of say, $4,500, whether it is billed monthly or all at once, seems modest, and it is. From a practice management standpoint, the idea is to consider the contribution of these modest fees when they are applied across your entire practice. This gets to the heart of even offering subscription services. First, although they make a high-margin contribution to the business, they cannot ever replace AUM fees. Second, the advisor must believe in their heart of hearts that access to a wide array of services is in the best interest of their clients. 

Finally, and parenthetically, subscriptions are just that. They should never be identified or labeled as retainers. First, that word draws the ire of regulators. Second, if you use the word retainer, you’re obligated to deliver monthly statements tracking time and associated costs, which opens the Pandora’s box of what you are charging per hour and whether or not there are different rates depending on who in your practice spent time on a client’s behalf. 

And, going back to the notion that things are simple until it comes to compliance, some state regulators don’t like the word subscription either. This is manageable of course, but that’s the point. Managing subscriptions with regulators takes time and resources. 

The governor’s office

As an RIA, you are SEC-registered, and likely in states where you operate. The important point is that when you offer subscription services in new states, the regulators are likely to take a high interest in how you are doing this. 

Almost every state requires specific language for subscription agreements, even for SEC-registered RIAs. And when you're registered in each state, your subscription agreement has to pass both SEC muster and state muster. 

The challenge is states vary in their focus. That said, most have very specific requirements for “prohibited activities,” and there is a wide variance in what is considered prohibited. 

It’s not that prohibited services are difficult to understand. Most are obvious, if not too obvious. "No person employs any device, scheme or artifice to defraud." Or, "no person shall engage in any dishonest or unethical practice in connection with the rendering of such advice." 

For advisors, the challenge becomes crafting different subscription agreements with prohibited activities that accommodate the requirements of the states in which they are doing business. A catch-all document may run to hundreds of pages. 

Subscription services offer significant potential for wealth advisory practices, providing steady revenue and enhanced client engagement. However, advisors must navigate complex regulatory landscapes with diligence and transparency. By prioritizing compliance and focusing on delivering real value to clients, subscription services can strengthen advisor-client relationships and create long-term practice sustainability.

 

Daniel J. Friedman and Brian P. Beck, CPWA are founding partners of WMGNA, Tax-Out Financial Solutions, a Farmington, Connecticut-headquartered financial advisory firm; Friedman is CEO, and Beck is president and CFO.

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