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As you review options for financial planning and investment guidance and advice, you will find three common compensation methods.

  • The advisor is paid based on what is sold. As an example, if your bought $100,000 of a mutual fund or insurance product (in this case often an annuity) with a 5% load, your cost would be $5,000. Financial planning is not included in the service model. We find that if financial planning is included, the goal of the plan is often to steer you towards the desired commissioned product.
  • Fee based on percentage of assets managed. With this structure, the advisor manages your assets. Your fee will be based on a percentage of assets managed. The most common assets under management fee is 1%. As an example, if you have investable assets of $500,000, you would pay $5,000 a year under this model. Some advisors provide financial planning advice when considering this compensation method, others will not.
  • Hourly fee. In this model, the advisor charges an hourly rate for the time spent on the project. This is a fairly common practice for planning only models and specific projects. It isn’t very common when considering ongoing investment management. When I created Disciplined Money, I chose to serve clients based on an hourly rate for both financial planning AND investment management.
  • In this model, the advisor usually charges a fee, but can also receive compensation from someone other than you. While I prefer to call this method a hybrid model, you may see it referred to as Fee-Based.

Clarifying Moment

I had just completed a plan while working with a different Fee-Only financial planning firm. As I often do, I asked what he thought of the planning process. His comments cemented the idea that I would need to alter my pricing model (and create Disciplined Money).

With the completion of his financial plan, he shared that he was pleasantly surprised with the projected level of success. Prior to entering the planning process, he felt he was in good shape, but he hadn’t really looked at the numbers until now. He (we) challenged the results from multiple viewpoints, but numbers are the numbers and he couldn’t argue that fact.

Like many, he was making decisions based on emotions rather than information. Our discussions were as much or more about the psychology of money as they were about dollars and cents. A good plan discussion often follows that path.

After thanking me for providing financial clarity, he stated he would like to have ongoing conversations. At the time (different firm and structure), that meant ongoing management of his investments with an annual fee of 1%.

He pointed out that once he retired, his plan projected a balance of close to $1,000,000 (lower at the time). Then he shared the point that clarified my decision. “Bob, while I believe there is value in an ongoing relationship and you have provided great insight, your current structure means I would be paying approximately $10,000 a year. That would be, by far my largest service expense.” That day, I knew I would be building a firm that could address the goals of clients like him.

What families really want from a financial advisor

I believe families want to better understand what it will take to achieve financial success without being sold products. They are willing to take the actions needed to increase their likelihood of success, but are not sure which steps to take. In other words, they want guidance. That may include investment management…it may not.

They desire a trusted, non-emotional, unbiased opinion as they consider current and future financial decisions. They want to revisit their plan as needed to determine if they remain on track. If they need to make course corrections, they want to know now, while they have time to make them.

If 1% isn’t the right number, what is?

For the most part, your portfolio is created during the initial planning phase. Going forward, rebalancing and adjustments do require time. The greater the number of accounts, the more time required. I feel the following is a better fee structure for those who wish to have ongoing investment management. The ongoing fee for financial and investment management advice is one hour per quarter per account with a six-hour minimum.

That may be confusing. Let me share an example, if you have 3 accounts (a taxable account, and two IRAs), your quarterly fee is $450 (current hourly rate is $150 at 3 hours per quarter). Your annual investment for investment and planning guidance is $1,800. Employer sponsored retirement accounts (401k, 403b, etc.) accounts are typically not included. Savings, checking and emergency fund accounts are also typically not included when calculating our fee. Accounts under $100,000 in balance may be combined with other smaller accounts when considering hours needed. If you have questions, please let us know. But, let’s assume three accounts for now so we can compare fees under various models. 

Consider the typical 1% fee structure. If your portfolio equaled $300,000, 1% would equal $3,000; $500,000 would equal $5,000. Of course, we already discussed the fee at $1,000,000. Many advisors that operate under this model have a minimum account requirement (sometimes $500,000; often $1,000,000 or more).

Consider a 5% commission. The same $300,000 portfolio has a cost (often hidden) of $15,000.

In our scenario (assuming three accounts), our quarterly fee would be $450 or an annual expense (investment?) of $1,800.

This is a solution I am excited about. The fees are based on time spent rather than a “going rate” that I didn’t really agree with. Of course, if your scenario requires additional time, we’ll discuss a solution. But, for 95% of families, this structure will fit.

If you have questions or want to discuss your situation in greater detail, let’s schedule a time to talk.