Question of the Day - Fees & Financial Planners

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Question of the Day - Fees & Financial Planners

By JLP | November 22, 2006

I really hope to get some dialogue going with today’s Question of the Day:

What is a FAIR amount to pay a financial planner/investment advisor for their services? Should it be based on the percentage of assets the advisor is managing or should it be based on some other measure?

Personally, I think MOST people would be better off with a strictly hourly approach to financial planning (assuming the planner isn’t billing too much). If you are reading this blog, chances are pretty darn good that you already know enough about planning that you may only need some hand-holding in certain areas. Paying $150 - $200 per hour is potatoes if it keeps you from making a huge financial mistake.

Topics: Basics, Financial Planning, Question of the Day |

Comments to “Question of the Day - Fees & Financial Planners”

Mike Says:
November 22nd, 2006 at 1:33 pm

Truthfully, I think “most” people would be better off having a professional manage their money for 1-2% of assets (depending on asset size), as long as that advisor doesn’t move their clients’ money into investments that pay commissions to the advisor. Seems to me that “most” people aren’t movitaved or responsible enough to manage their financial planning (hence the negative savings rate). The most important point would be to find a true fiduciary.

“Some” people, who are more knowledgeable or motivated, would be better off paying a $150-200/hr “fee” for financial advice.

JLP Says:
November 22nd, 2006 at 1:55 pm

Mike,

I think that negative savings rate is a myth because I don’t think it takes into account retirement savings (401(k) contributions).

samerwriter Says:
November 22nd, 2006 at 2:50 pm

We talked to a professional manager maybe a year ago. I don’t recall the exact fee structure, but it was something like 1.5% of assets up to $500K, 1% of assets from $500K to $1M, and .75% of assets beyond $1M (though beyond that point the fees become negotiable).

For us the kicker was that until you had $1M in assets with them, they basically put you in some “standard” fund allocation. They gussied it up, of course, by calling it something like a “custom mix of top performing funds blah blah blah”, but clearly your money just went into a big pool with other people’s money, and was invested in bulk. For 1.5% of assets, that didn’t seem like very personalized service.

We also talked to several fee-only advisors. I was more impressed with these folks, because they seemed to be interested in customizing a plan for us. Of course it’s only natural that they want to make something very custom, because they’re paid hourly. The more custom the plan, the more they make.

Ultimately we decided that for us, like I suspect for 95% of people, standard target retirement funds couple with a money market based emergency fund provided a diverse, balanced, tax efficient portfolio for low cost and very little hassle. I do still pay a fee-based advisor if I have specific questions about a specialty area, but that’s a pretty rare occurrence.

Matt Says:
November 22nd, 2006 at 3:00 pm

I like the percentage of assets myself. But what would be fair and ideal in my opinion is a % income generated; I think this would motivate the financial planner to give good advice rather than just a generic statement. A good financial planner would then be made rich by making their clients rich.

Andrew Says:
November 22nd, 2006 at 3:21 pm

IMO - A financial advisor should be paid by the hour for consulting services (when the advisor is not in any control of assets).

If I am giving control of my assets to the advisor, then I think that the advisor should be paid a percentage of the RETURN the advisor generates for me. If I lose money (taking into account any trading fees and loads and whatever else might be charged to me by his/her choices of investments), I don’t pay. If I make money, I share with him/her in the profits. I don’t know what a fair percentage would be in this case, but I DO know that I don’t care how large the assets are that the advisor controls for me - if s/he loses me money, I shouldn’t have to pay.

Perhaps a tiered payscale based on the risk of the investments (i.e. a higher % if I want to be aggressive, a lower % if I want to be conservative). This would assure that the advisor is motivated in MY interest instead of their own.

dimes Says:
November 22nd, 2006 at 4:31 pm

I’m a big fan of hourly pricing, personally, since right now we only have index funds and I really need more of a “strategist” than a “manager.”
Last week I heard from a financial advisor who required at least $10000 to talk to and he took out 1.5% as compensation. That didn’t interest me one bit.

ciwood Says:
November 22nd, 2006 at 5:21 pm

I do not need a financial planner. However, my wife might need one some day. A financial advisor should assist in more than portfolio selection and allocation. They should stand as a protector shielding their client from poor tax and estate decisions as well as keep the wolves away. Both my parents died at 80 and my mother said it was a blessing to tell all her sales friends she would love to help them if they would just clear it with her financial advisor!! That being said, I think 2% is ridiculous while .5% for simply selecting an appropriate allocation and being available for other financial questions sounds doable. That is what I intend to charge when I pass my CFP if a client needs continual hand holding as my parents did and my wife will. For small portfolios or clients who do not need continual support, I will charge an hourly fee. I think an advisor should be held to a fiduciary standard but not be expected to outperform an index. I am against performance incentives which might end up causing perverse results.

JLP Says:
November 22nd, 2006 at 5:36 pm

I agree that 2% is too much for a planner to charge.

I also agree that a planner SHOULD act as a fudiciary, which is something a financial advisor at a brokerage firm is not.

I did some research a few years ago and as far as I can tell, pay-for-performance can only be done with “qualified” investors (those with a net worth of $1,000,000 or more). Although I like the concept, I can see how it could easily become abused if the advisor took on too much risk trying to shoot for the moon.

moneysmartlife Says:
November 22nd, 2006 at 8:43 pm

I’ve had great experience with a fee-only planner, paying for advice by the hour. It is great for someone who is already familiar with financial concepts but is looking for some professional advice.

I’ve mentioned this before but our financial planner is both an experienced CPA and a CFP, that way she knows the investment and taxation side.

Being prepared when you work with your planner can save you a lot of money. They are going to charge you the same hourly fee for their time, whether it is organizing and deciphering the folder full of records you gave them or actually doing financial analysis.

Have your ducks in a row, specify exactly what you want from them, and ask for an estimate before they begin work. This way you are optimizing their time (saving you money) and know exactly what to expect for your money.

Joe Taylor Says:
November 22nd, 2006 at 8:56 pm

Here is a simple tip on finding an advisor who has fiduciary responsibility.

An advisor who is registered as a Registered Investment Advisor only is held by law to a fiduciary standard. An Advisor who is a Registered Representative (series 7 licensed) and a Registered Investment Advisor will sometimes be held to a fiduciary standard. An advisor who is licensed as a Registered Representative only is not held to a fiduciary standard.

Kevin Says:
November 22nd, 2006 at 10:05 pm

I think that charging a certain percentage of assets (1-1.5%) is outrageous, even if the advisor is working only for you. For what other service do you pay someone a percentage of your assets? First, if you have significant assets, it’s more money than you would pay for any other service. Secondly, the person giving the advice receives the full amount whether they do a good job or not! This pay scheme does not provide enough incentive for the individual to work hard for you.

I would like to find a financial advisor whom I could pay hourly, but I have not been able to find one, and am not sure where to look. Any ideas?

Also, it’s a common myth that fee-only is the same as hourly (mentioned above). It’s not. It just means that the financial advisor is working only for you; that they are not getting a commission based on a sale of a particular product. I believed this myth until I went to the NAPFA website to search for an advisor. To be listed there you must be fee-only, but I couldn’t find one advisor in my area who charged hourly; they all charged a percent of assets.

thc Says:
November 23rd, 2006 at 10:40 am

Kevin: Check out Garrett Planning Network. I believe they are all hourly planners.

Sorry you feel the way you do about asset-based pricing. My firm has hundreds of very satisfied clients who seem to like it very much.

thefeeonlyplanner Says:
November 23rd, 2006 at 10:46 am

Hi JLP and everyone:

I am a long time reader and first time poster. I am also a fee only financial planner and would like to share with you my views on fees.

First, there is no free lunch, we in the financial services arena must get paid. A large percentage of us still gets compensated by methods which are not transparent to the client and usually full of conflicts of interest. We in the fee only world like to call this side the “dark side”. Are there ethical and good financial planners in this side? Yes of course. Will I ever recommend a prospect to them? I have not and probably never will. So, let’s now move on the good side:-)

Fee only means we get paid directly by the client ONLY. Whatever we recommend has absolutely NO relation whatsoever to the amount of compensation we earn! I tell prospects I meet this: “I am 100% independent, there is no company behind me pushing me to recommend a specific lineup of products and I am 100% fee only, ONLY YOU pay the bill I send you every quarter, you ALWAYS know how much I earn and of course how much your portfolio earns every year”. So, the jump from doing business “my planner never charges me, the financial plan is free or costs only $75″ to “holy crap, I will be paying you THIS much in dollar figures every quarter?” is quite large and some consumers never make that jump because they are not educated enough to realize really how much they are ALREADY paying with their current provider. My last client is a big broker refugee (they almost all are) whose portfolio is full of variable annuities within IRAs, over 90% in Large Cap equities, almost absolutely no exposure to small cap and international and total expenses of close to 3% EVERY year that they are paying for this very bad advice!

When I first started my career I charged both hourly and assets under management. I now charge a one time fee for a fully customized comprehensive financial plan that every client must first do and then I charge based on assets under management starting at 0.85% for the first $1 million and going down from amounts over that. I also think that charging over 1% is too high and charging 1% or more JUST for investment management is absurdly high! My minimum annual fee is $3,000. I stopped offering hourly advice almost two years ago. Why?

First, you must realize that talking about methods of compensation has been a hot topic in our industry. I remember years ago the extreme back and forth between the dark side and us. You almost never hear about that anymore since the good commission earning financial advisors have been coming over to the good side and the huge number of them left over there are just too busy prospecting to bother to have a professional exchange on what is better for the client. So, in the fee only world, we now have hourly, assets under management and retainer, which appears to be gaining ground lately. Let me tell you why I charge assets under management and the rationale behind it.

I provide comprehensive financial advice, meaning all clients get ongoing financial planning advice, ongoing investment management, tax planning and preparation, and of course reporting of investment performance. They are encouraged to call with anything that currently bothers them and it does not even have to be financial. Case in point, just in the last two weeks, I am meeting a client with her brother and 85 year old grandmother who may be showing signs of Alzheimers and getting together to help her with estate planning, meeting another client with a mortgage broker to talk about a new house they are looking to buy, and helping a couple with arranging their wedding anniversary trip to Hawaii. WHATEVER time I spend doing this my fee will still be calculated the exact same way! Billing AUM is common and straight forward and clients find it very easy to comprehend. I do not need to explain how I calculate my retainer (percentage of net worth plus or minus this….etc) which can get confusing and arbitrary at times. With AUM there is nothing to “get”, add the investment accounts times the annual fee divided by 4 (quarters), boom, you are done, end of story. So, some quarters some clients may be very profitable but sooner or later something will happen (job loss, new job, death, birth, stock options, etc.) that will really make you put lots of hours, over and above, that specific quarterly will need to be at. Heck, I am still working on a client whose wife passed away some time ago! Charging this way also keeps us on our toes and always on the lookout to improve the service to the clients because you definitely do NOT want to have client contact only every 3 months when they receive your bill!

I am not saying this AUM method is the best, but it is the best for me personally and how I operate my own firm. Does it have no conflicts of interest? Absolutely not! But, as a fiduciary, you must do the right thing always for the client ALL the time, otherwise you won’t be in this business for very long. I have recommended clients to pay off mortgages even though that will not be advantageous for my fees but who cares? It’s the client’s money and if they want to have all debt paid off (which I have a heavy bias for)I am all for it!

So, now let’s move to the argument for the “retainer” model. They say that you can really customize your fees based on the complexity and amount of work of each client and it is more “fair”. It may well be but I like the simplicity of the AUM model, no surprises, clients get it right away and no need to reset the amount every year, have them sign new contracts, update ADV forms; in other words, lots of bureaucratic hassle I would rather not deal with because it takes time away from servicing the clients. So, my beef with the retainer model is the extra office work that is required to be done and the loss of simplicity in setting the fee (you need to explain how it is calculated each year). It may have “less” conflicts of interest built in but, as a solo practicioner, the energy and amount of work needed to change billing methods and institute this change is too much and I would rather not deal with it.

Which leads us to the hourly method…I offered this method for the first years of my practice and I must admit I never billed enough to make it profitable. I tend to be very detailed oriented (due to my CPA background) and committed to a comprehensive approach that I always underestimated the amount of hours an engagement will take. So, lots of energy would be spent on an engagement, I could not charge as much as I should (if I did, the dollar sensitive client will likely go elsewhere), it took away valuable time from ongoing clients and it got to a point that it just does not make sense for me. My ongoing clients are entitled to my full attention and it is not fair to them if I keep doing these one time engagements. The other issue I had with them is at the end of the engagements the client walks away. The proactivity I have with my ongoing clients is just not present. So, for example, let’s say in my recommendations I suggested buying XYZ fund and then that fund’s manager left or the fund took a big drop….My ongoing clients will surely hear of me with my thoughts whether to stick with the fund or perhaps do some tax loss selling. With the hourly clients I could not do anything, the engagement was over…and that would eat me up. So, after a while, I decided no more hourly work, I would rather devote my time to ongoing clients who like my comprehensive approach and we are all happier this way.

Where do you find hourly planners? Try http://www.garrettplanningnetwork.com/pages/splash/index.htm
and of course try some of us at http://www.napfa.org/ Many of us NAPFA members offer hourly advice and if we do not we can probably direct you to a planner who does.

I hope this helps the discussion and now, excuse me, while I go and take a quick bite of that pie upstairs before the main course.

Happy Thanksgiving to all!

George

Steve Says:
November 23rd, 2006 at 11:23 am

I’ll admit my bias up front: I’m an hourly financial planner serving clients across the U.S. so take what I say with a grain of salt.

There are a number of issues raised in the comments and I will try to touch on the most important ones.

First, I chose the hourly business model because I believe it removes conflicts of interest in the client relationship. There are just too many conflicts of interest with the most popular business models used by 98% of all advisers:

“Assets Under Management (AUM)” - Charging a percentage of assets, and

“Commission-Based” - Selling financial products on commission.

That’s not to say that advisers using these business models are bad or dishonest, just that there are very real conflicts that exist. Those conflicts can affect even the most honest advisers.

The rap on hourly advisers is that you might get one who inflates his hours or pushes unnecessary services in order to bill more time.

(Please note, however, that if you really want to get rich in this business, it is far more lucrative to work on the AUM or commission model than it is to bill your time, even if you were secretly nickel-n-diming clients for a few extra hours. The hourly model is the least attractive business model for a financial adviser in terms of his or her own wealth. That’s why so few go this route to begin with.)

As the client you should always make it your business to be informed and know what you are buying before making any commitment. In my case, I provide a free initial consultation during which I spell out exactly what work I think a client needs and how much time it will take me to do it. Potential clients know everything up-front. Then they can do their own research and compare me to others or versus doing it all on their own. The client decides what is best.

Second, there is a misperception that hourly advisers cannot help manage investments on an ongoing basis. That is not true. When I do a plan for clients, I spell out exactly what investments they should hold AND where they can get those investments in the most conveneient and cost effective manner. I do not have custody of their funds or access to their accounts. Clients who want regular reporting and ongoing advice beyond the initial investment recommendations simply have duplicate statements sent to me for all of their accounts. I put together a comprehensive summary, review performance, etc. and recommend any changes as necessary. (I will also make proactive recommendations between these quarterly reports if something drastic comes up.) For this clients pay a nominal quarterly fee that I can assure you is far, far below 1% of their assets. So you don’t have to turn your money over to someone or pay astronomical fees to get good ongoing advice. Not everyone wants/needs that kind of hand-holding, but there are many who do.

Third, so what is fair to pay for a financial planner or adviser? On the hourly scale, it is tough to say. Millionaires will gladly pay $500/hour for top notch financial advice. For the rest of us, probably anything under $250/hour is acceptable, depending on what is needed and what the local market will bear. Let’s use me as an example. I bill at $150/hour. A complete financial plan can cost a family $3000 to $4000. That’s a lot of money. But you have to consider what value is received in return. A complete financial plan includes far more than investments, which everyone seems fixated on: emergency planning, retirement planning, education planning, investments, tax planning, estate planning, income & asset protection strategies, debt management, budgeting, etc. That’s quite a bit to tackle and it takes a high level of expertise and experience to put together a solid plan that sets you on a path to finaicial success by accomplishing your goals in ALL of these areas. Investments are just a piece of the puzzle.

What is that worth to you? How many avoided financial blunders does it take to recover the cost of such a plan? I meet people every week who have blown many thousands on stupid schemes or who have left many thousands on the table due to ignorance about their finances and investments.

Here’s some more perspective. Most people will burn up $18,000 in realtor commissions to sell their $300,000 house (at 6%). They’ll pay that kind of money for a one-time transaction that theoretically garnered them an extra 15% on the sale price of their home. Comparatively speaking, what is the value of a comprehensive financial plan that will reap you rewards and benefits for years to come? I’d say a good financial plan is a bargain, especially since most of the recommendatons end up paying for the cost of the plan fairly quickly.

Finally, a note to Matt and Andrew. You generally do not want to pay an adviser based on the amount of gains they earn. In Michigan where I’m licensed, that it is not even allowed. The reason is that the adviser has a 100% incentive to take the riskiest route possible in order to earn more money. Throw all prudence out the window. The adviser loses nothing if the portfolio goes down, but can make a killing if it goes up a bunch. That’s a perverse incentive that will normally leave most clients with less money than they started with.

Sorry this is so long. It’s a great question and the discussion is very good. Hope my thoughts added some value and perspective from the adviser side.

Keep up the great work JLP!

thefeeonlyplanner Says:
November 24th, 2006 at 12:12 am

Hi Steve,

Great post. I would like to make some comments on your very thoughtful post.

>>>>>>I chose the hourly business model because I believe it removes conflicts of interest in the client relationship.

Did you perhaps neglect to add “most” in front of “conflicts of interest”? I personally believe that every compensation method has some conflicts of interest, ALL of them! Does the hourly method have less conflicts of interest than other methods? Perhaps. I think we all agree in this forum that the commission method is indeed the method with the most conflicts of interest!

>>>>>>>>>>>The rap on hourly advisers is that you might get one who inflates his hours or pushes unnecessary services in order to bill more time.

The rap is there just like the rap is there for us charging AUM making more money off clients. I think these kind of raps will always be there. We must recongnize it and still try to excel in such a way that works best for our firm AND clients! And that’s where the key differentiator comes in…

Let me explain.

There are basically three types of consumers when it comes to financial services: do-it-yourselfers, validators and delegators. The majority of consumers out there are do-it-yourselfers who we do not just bother with. Do they need some help? Most of them do but they don’t know it (some do just fine themselves!). The validators are ones who are doing it on their own but need some guidance and this is the group that is perfectly suited for the hourly model. The next (and smallest by far) group are the delegators and this is the group I target. In fact, I tell prospective clients “if you have the time and/or interest to do this yourself, it can be done since it’s not rocket science”. But coming aboard in my firm you will no longer worry about this stuff, we will save you a bunch of time so you can devote to what is more important to you (family, career, hobbies, spiritual, etc.) and let you focus on what you do best, this is what we do best!”

I gave the hourly model a shot and it does not work for me. I came into this business from a CPA firm and never liked that I had to bill my time. For example, I have become very good at something (say, asset allocation) and takes me a fifth of the time it took me when I first started doing this work…why should I bill LESS for it when I probably do this much faster AND much better now? I want to do the handholding for a small number of clients and the AUM works for me and for them. The way I operate is certainly NOT for everybody, and I make it very clear in the very beginning. It is always up to them to hire me or not (assuming I want to have them as clients too).

So, this whole debate area here is more about desired business practice and target marketing.

>>>>>>>>>>Not everyone wants/needs that kind of hand-holding, but there are many who do.

I specialize in hand-holding:-)

>>>>>>>I’d say a good financial plan is a bargain…

Amen!

>>>>>>>….so what is fair to pay for a financial planner or adviser?

Less than $250 per hour for hourly consultations.
1% and less for Comprehensive financial advice.

I am in Michigan too and if we charged based on performance we would be locked up!

The Lions served another turkey today…hope the one you ate tasted much better, mine did:-)

Respectfully,

George

Mighty Bargain Hunter » Roundup for the week of 19 November 2006 Says:
November 24th, 2006 at 11:39 pm

[...] All Financial Matters’ recent question of the day asks about fees and financial planning. [...]

Generation X Finance » Thanksgiving Friday Five Says:
November 26th, 2006 at 10:37 am

[...] Fees and Financial Planners - JLP had a question of the day regarding fees and financial planners and there is a bit of good discussion regarding the different types of planners and how they are paid. [...]

» Weekly Blog Roundup on Blueprint for Financial Prosperity Says:
November 26th, 2006 at 10:59 am

[...] Last but not least, being a Financial Advisor, JLP is in a knowledgeable (albeit conflicted) position to give advice on what a fair amount to pay for financial advice is. While shelling out $150-$200 for advice is a little steep from my mid-twenties “never talked with an advisor” mentality, he is correct in that if it can save you thousands in mistakes, it’s clearly worth it. But when they say that monkeys with darts can out pick experts, it’s a little difficult to justify paying more than a handful of bananas… right? [...]

Steve Says:
November 26th, 2006 at 8:50 pm

George:

Good post. We see the world in much the same way. I think we also live and practice in the same general area even though our paths have not crossed until now. Click on my name (above) to get to my blog. From there you can send me an email. I’d like to continue our dialog. Thanks!

Steve

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Question of the Day - Fees & Financial Planners