Traditionally, financial advisory firms charged clients via an assets under management model. With this fee structure, firms focused primarily on investment management and offered financial planning as a free add-on service.

But the AUM fee structure has problems that become more apparent as advisors start targeting the next generation of potential clients. Members of Gen X and Gen Y don't always have large piles of assets and therefore, aren't profitable for advisory firms. These clients have a need for financial planning first and foremost, with investment management a lower priority simply because these folks have less money to invest.

Some financial planners have moved away from the AUM model and switched to an hourly fee structure, but this comes with problems too. Advisors who work hourly require a massive client pool for their businesses to stay profitable, and these advisors must directly trade their time for dollars. This can make it difficult for a business to scale and grow in a manageable way. (For more, see: Small RIAs: How to Level the Playing Field.)

If these fee structures don't work for younger clients, then what does?

The newest way to charge clients sees firms providing financial planning services for a monthly fee, in a form like that of a cell phone bill or a gym membership. Advisory firms working under this structure are basically on retainer and they send a monthly bill for their services. They also put the focus on comprehensive financial planning, and some offer investment management as an added service for a separate fee. (For more, see: What's the Difference Between Fee- and Commission-based Financial Advisors?)

Affordable, Accessible

"It is a smart fee structure for two reasons," said financial planner Scott Frank of Stone Steps Financial, who specializes in Gen X and Gen Y clients and uses a monthly subscription model to serve this demographic.

"First, a monthly fee is affordable and accessible. If you can afford your monthly Crossfit or Pilates membership, you can afford my fee as well. Second, the main alternative to a subscription membership is hourly planning. I don't want clients to have to think, 'Is this a $200 call?' when something comes up in their financial life. And something always comes up. By paying the monthly fee, I am on their team and they can call me whenever they have a money question." (For more, see: 5 Must-Read Blogs for Financial Advisors.)

Daniel Wrenne of Wrenne Financial Planning agrees that the subscription model helps clients to be more willing to come and talk to him instead of waiting until they feel like they have a problem big enough to justify a hefty fee in exchange for a phone call. "It incentivizes [them] to follow up with us," he said. Wrenne adds that the monthly fee helps spread out the cost for the clients, and charging this way removes some conflicts of interest that are inherent with the AUM model. 

A Relationship, Not Just a Transaction

Other planners point out the value of a monthly subscription lies in the ability to focus on the relationship with the client, instead of just focusing on how many assets they have or how many hours of work they can rack up.

"It creates a feeling of trust; I'm someone who will be with them as their lives evolve and they need to make the best decisions they can for themselves and their families," said Cristina Guglielmetti, president of Future Perfect Planning. "It provides an easy-to-understand mechanism for clients. They just want to have you available whenever they have questions." (For more, see: Why Robo-Advisors Need to Grow Up.)

Pam Horack, CFP and founder of Pathfinder Planning, said that a subscription model opens the doors to more connection with clients — and they appreciate that. "I know my clients are making a payment to me each month, so I incorporate at least two monthly touch points, often more, into my service structure," she said. "This allows us to feel connected by more than just a payment. No one wants to pay a bill each month and not receive service."

The Bottom Line

For advisors who want to switch from an AUM or hourly model, the monthly subscription may offer a viable alternative, helping to make younger clients more profitable for financial advisory firms. "It's a way to tap into the Gen X and Gen Y market," said Michael Solari of Solari Financial Planning. "Most advisors will require an asset minimum which means they are looking for people who already have wealth. I want to work with individuals and family that have potential and help them build wealth." (For more, see: How to Build a Financial Plan for Gen X, Y Clients.)