Financial planner - hourly or retainer?

So…I made the mistake of posting this on the Bogleheads website. It got the reaction that I should have expected. Nonetheless, I’m curious to hear from this peanut gallery. Let me know what you think.

I’ve mentioned on here that I’m a CPA in a tax practice, and I’m also a registered rep. (Please hold your applause.) I’m also a PFS and CFA, and as such, I can offer “financial advice” through my RIA. And after tax season, I plan to start offering financial planning services to our clients. (Just to note–since I’m an accountant, I can use the accountant’s exclusion as long as the advice is “incidental to the practice of public accounting”. However, that only goes so far. EG - I can tell a client that municipal bonds are not subject to tax, but I cannot recommend an asset allocation or a specific mutual fund. That is outside the realm of “public accountancy”.) I plan to use the “financial planning” umbrella to do everything that is not specific to portfolio management (asset allocation, asset location, security selection, and monitor & rebalance). This includes: - estate planning (will, living wil, HIPAA, durable POA, medical POA, financial POA, etc.) - retirement planning (estimating retirement budget, creating a savings plan, monitoring progress, spending strategies) - Social Security optimization (both in advance AND at the point of retiring) - insurance analysis (I have both a life & health AND a property & casualty license) - Elder planning (TBH, I have very little experience or knowledge in this area) - Philanthopy (split interest trusts, qualified charitable distributions, donations of appreciated stock) - Intergenerational wealth transfers (estate tax planning, postmortem tax planning) - Business succession (buy-sell agreements, key man life insurance) - Miscellaneous, but oft-overlooked things (e.g. beneficiary designations and 401k optimization) My question to the community is this–if you were my client, would you rather pay a once-a-year retainer fee? Or would you rather pay a straight hourly fee? Retainer - The retainer would be high in the early years, because we have to hash out all these details and actually implement parts of the plan. Later on, when we are on cruise control, and all we are doing is reviewing and making incremental changes, the retainer would be relatively small. But it would remain fixed for the duration of the year. And in some years, that would mean that I get more out of the deal, and some years the client gets more. But the client would be less focused on the “hourly bill”, so they might be more inclined to engage me, thus benefitting them in the long run. (And it benefits me, because I know what my yearly revenue is going to be.) Hourly - Like the retainer, it would probably start high and eventually decrease. And it keeps things straight–the client gets only what they pay for–no more and no less. But they might look at the $175/hr bill and balk. “You know what, I don’t need Greenman to review my estate planning documents. After all, nobody has died or gotten divorced. No need to pay him money to do nothing.” (Nevermind the fact that the estate tax exclusion changed, which changes the entire strategic planning of your estate. Nevermind the fact that daughter turned 18, which necessitates a medical/financial/durable POA. Nevermind the fact that your term life insurance expired two years ago, and now you’re naked.) Just looking for comments or opinions.

p.s. Yes, I do plan to manage my clients investable assets at standard rates (i.e. 1% for the first two million and scaling down from there). Yes, I do plan to sell Variable Annuities and Variable Universal Life when appropriate. Yes, I plan to sell A-shares of mutual funds, when appropriate. I’ve discussed this before on this site. I’m not going to change my mind and you’re not going to change yours, so let’s just completely omit the whole debate about whether advisors are worth paying for. However, I would welcome opinions or comments about how fees from one service should offset fees from another. Or whether or not I should allow people to manage their investments themselves or keep their “legacy advisor” and charge them a de-facto AUM fee.

In middle of a pint of Guinness, will read later. I promise!!!

Will you be considered a fiduciary?

I am. My clients have access to investor class shares. Pretty sure I can’t put them in “A” shares of the exact same fund.

Probably a dumb question but is this like a new concept or are you following someone else’s business plan?

Why don’t you roll it into the management fee (people are paying for mutual fund selection?) so say, 1.0% straight investment management, 1.25% for premium service. on $2mm, that’s an extra $5k a year, at $175/hr, 29 hours… and that’s assuming they use up 29 hours a year, ever year. Even if you have to do 40-50 hours of work, you got them at the higher fee for years to come.

^Good question. While I know for certain that I’m not the only one who does this, I’m not working for a firm that offers this kind of service. So I have to come up with my own model. I don’t have any footsteps to follow in.

Actually, you do bring up a good point on the management fee. Never looked at it that way. Don’t know how that would pan out with some of the lower-end clients, though. (A quarter-point of $100,000 is only $250 a year. That’s $20 a month.)

I really don’t know how to answer this question, although I’m sure some others can help.

Technically speaking, I’m “only” a registered rep. That said, I’m an independent, and I get to do all the stuff that you would normally expect from a fiduciary. I can also be an IAR under my B-D’s corporate RIA. But I like being able to sell A-shares and variable insurance products when appropriate.

And to be honest–I know “fiduciares” are really proud of their F-word, but I don’t know if it makes any difference at all. really don’t know the difference between a “suitable” basket of mutual funds and a “fiduciary” basket of mutual funds.

its when you try to push in house products. or products that generate you a lot of fees!

as an independent you prolly dont have in house products to sell! so thats good! but personally i consider anyone selling variable insurance as not a fiduciary since those typically have ridic fees. but thats just my opinion!

Fiduciary duty means doing what’s best for the client. Brokers only need to meet a suitability requirement. A fiduciary could recommend a high fee fund if they truly think that fund is best for the client. But a fiduciary would be hard pressed justifying the recommendation of a class of shares with higher expenses when a lower fee option in the identical fund is available. One might be able to make a justification for class A shares if any other compensation arrangement for your services would be more expensive. A detailed disclosure of how you are compensated would be required including the disclosure that shares with a lower fee are available. RIAs are held to a fiduciary standard by law. Brokers are not. And, the CFA charter requires one to act as a fiduciary.

There is a reason the industry lobbied so hard to kill the law that would have made just about everyone fiduciaries. It’s real for sure.

I don’t have time today to post a detailed response to this but it sounds like your going in the right direction.

What is your ideal business look like?

Where are you right now? What is your growth goals? What does your ideal client look like?

What do you need to do next? Looks like you have summarized your services nicely; do you have a service plan for each client (tier in terms of AUM for eg)?

What do you want your practice to look like in 5 years? How many households with AUM? AUM target ($200 million, $100 Mill?)

How big do you want to get in terms of AUM? How hard do you want to work? How much vacation do you want to take?

Are you going to need to hire some staff support at some point? What does their skill set need to be?

Don’t put the cart before the horse.

Huh. I saw that Greenman on Bogleheads. That was you? Yeah I think that question went about as planned.

^Yeah. It’s the same Greenman.

Like I said, there are a few people on there who really know their stuff WRT personal financial planning. And I value their opinions, even if we disagree on some things.

Just curious how many advisors are there in the U.S. that work under the hourly fee model? I know in Canada that number would be very small. I do offer clients a flat fee for a full financial plan, but that would only be for a prospect. I only take on new clients where we do the full plan and manage the investment assets.

But, for most all retail clients under say $3 million in AUM, unless their planning situation is really complex, (i.e. business owner with a smaller portfolio, a lot of wealth tied up in a family business etc.) they won’t be willing to pay for just the plan that you develop etc. Most times, it just ends up sitting on a shelf somewhere, unless they are going to pay to help implement as well.

I think it’s easier for people to digest something like 0.7% fee, compared to $500 hourly fee, even if the first one is much more expensive.

Took a look at your Bogle thread. Just something you might want to clarify. ETFs only defer taxes for the end user by avoiding capital gain distributions. The tax savings over funds are not ultimately as great as implied by your post. Certainly open to being corrected if I’m in error…

^ well yes I agree with that to some extent. It really depends on the type of service offering he wants to offer to prospective clients.

This is a really important point that shouldn’t be overlooked: what type of client is he going to be working with that prefers to pay a % of AUM for all the services, vs. a client that just wants to pay on a hourly basis. Very different clients, which requires different service models. He’s only got so many hours that he can work in a year.

If he can sign up another 30 households to hit his target for AUM and revenues, does it even make sense to offer hourly services? Capacity can be a big issue in a practice.

@Mike - let me answer these as best I can.

I want a “lifestyle practice”. I don’t want any employees. I may (or may not) continue to work with a CPA firm, but that’s a totally separate business. My business will just be me. (If I decide to leave the CPA firm, then I will probably continue to do the relatively simple tax returns. I’m not doing anything terribly complex, because I just don’t have the time to devote to it. I’ll refer all the hard stuff out to a “real” CPA.)

Right now, I’m in the infancy stage. I have four clients clients, with a total of about $2m under management. I haven’t identified any real growth goals. (Not that I don’t want to grow, I just don’t have a “growth plan”.)

Ideal client is a self-employed independent contractor or small business owner. Makes good coin, but has problems. (Mo’ money, mo’ problems.) He needs all the services I mentioned, and is willing to pay the AUM fee plus the financial planning fee (plus the tax prep fee, if necessary). Client is born in the 70’s or 80’s. (I was born in January 1980, so that means that they are within ten years of my age.) Total investable assets = $2 to 10m.

If I can get 30 clients like that, I will be happy as a pig in sh!t. I’m not looking to change the world or save the world. I just want a select group of clients that I can take care of. If I get to $100m in AUM, that’s more than I expect.

With 30 clients, I expect to work a bit during tax season, but only 20-30 hours a week after that. I’m not much of a vacation-taker, but I don’t want to work 60 hours a week forever. Working 20-30 hours gives me plenty to do, and I can fill my time with volunteer work.

^ ok good. (So, you realize that there is a lot of admin type work that is related to all the investment and planning services that you will have to take on, in addition to running the practice).

To me, it sounds like you should be charging a % of AUM and provide comprehensive financial planning and managing the portfolio assets. An hourly fee model can be unpredictable in terms of annual gross revenues.

^Actually, I plan to do both.

I see “financial planning” and “investment management” as a completely different set of services.

Take the people on AF as an example. You guys know quite a bit more than me about this “investments”, but most of you don’t know squat about a durable POA, a split-interest trust, or whether an inter-vivos marital trust qualifies for a basis step-up. I’m not saying you’re not smart or good at your job—it’s just that this isn’t your job.

Most people can go to Edward Jones and get a basket of mutual funds. They have to go elsewhere to get “real” advice from a “real” planner.

“Throw money in some mutual funds and rebalance once a year” is NOT financial planning. It’s product sales.

I thought estate planning attorneys handle most of that or for the BSDs on AF, their family office.