Hourly Financial Planning

Who is our “typical” hourly planning client?

Our hourly clients are DIY investors who realize that the complexity of their finances is increasing. However, they don’t want to hand over their investments to an advisory firm or pay an Assets Under Management (AUM) fee. They are typically looking for someone to pull all the financial pieces together for them and come up with a strategy and financial plan that they can execute with updates and check-in meetings annually or as needed and pay an hourly rate for ongoing services.

What is our hourly financial planning fee and process?

We provide financial planning and advice at an hourly rate of $385. We start off every relationship with a new client with a flat fee comprehensive plans so that we are all on the same page with organization and ongoing financial strategy. The price of this plan is based on the complexity of your finances and your goals. Most comprehensive plans cost between $4,000-$15,000 and are delivered within 30 days of project start. You’ll receive a flat fee proposal to complete your project after our initial, no-obligation, introductory meeting.

After the initial plan, all future financial planning services and meetings are billed at our hourly rate much like you would paid an accountant or attorney.

We default to annual meetings with our hourly clients to renew their plan and address any questions or concerns that have come up since our first project. While not mandatory, we believe these annual meetings are critical to staying on track and creating strong, long-term relationships with our clients.

Meeting more frequently than once a year is always an option regardless of project size.

Our Hourly Fee vs. AUM Fees

The most common fee type for financial advisors is an AUM fee. AUM or assets under management fees are considered fee-only because the advisor receives no commissions. However there are significant differences between hourly fees and AUM fees.

A fixed fee, such as the project fee we charge, does not change based on assets, but is fixed based on the complexity (hours) of the advice needed. We also never take control of your investments or require you to transfer your assets.

Let’s compare two potential clients who would be well suited for our hourly financial plans:

Bobby has $4.5 million invested in a portfolio of index funds. He is single, has no children, a W2 income, and no debt.

Sally has $750,000 in investments and a high income that includes stock options, bonuses, and some 1099 contract work. She and her husband own two rental properties and have three children that need college savings. Did I mention the mortgage, equity lines, and future vacation home?

We would charge a relatively low fee for Bobby’s plan due to the low complexity despite the high account value. On the other hand, Sally would require a higher project fee due to the complexity of the whole financial picture. In these cases, investment assets are a small piece of a puzzle with a lot of pieces that need to fit together. We believe in providing personalized and comprehensive advice on the entire financial situation and charging accordingly.

Based on an AUM fee of 1%, Bobby would pay $45,000 per year compared to Sally’s $7,500 for investment management despite having a simpler financial situation and this fee may not even include any financial planning. Worse yet, imagine if Sally’s situation actually became simpler (kids out of college, debt repaid, real estate sold). Assuming her account values went up, she will end up paying more per year for a decrease in complexity.

AUM Conflicts of Interest

Since the AUM fee is based on assets and not performance, whether the investment choices made by the advisor work out, the client is still on the hook for a fee. It is common for AUM fee proponents to argue that an AUM fee ensures that since their fee is tied to the assets then there is “skin in the game” because the performance of the portfolio affects their income. However, the change in fee is actually quite minimal.

Let’s use this example: You have a $1,000,000 portfolio and your advisor charges an AUM fee of 1%.

If the portfolio earns a 0% return, you still pay a fee of $10,000/year.

If the portfolio earns a 10% return, the portfolio value is $1,100,000 and you pay a fee of $11,000.

If the portfolio loses 10% , the portfolio value is $900,000 and you pay $9,000.

While the advisor’s income did in fact move with the performance of the fund, the “skin in the game” is very small and you are paying at least $9,000 every year. Worse, if you had a portfolio of $5,000,000 you’d pay five times the fees for very similar if not identical investment strategy and effort.

Windfalls

Another issue is with a cash windfall or high savings. If you receive a $100,000 inheritance or save an additional $100,000 from a bonus, you now have to pay an additional $1,000 every year for someone to add this to your portfolio to be managed the same as the rest of the portfolio.

Debt Repayment

If you have the choice of whether to pay off your student loans of $250,000 or add $250,000 to your investment account, what is the best option? An advisor that you compensate with a flat fee can do the analysis and give their opinion without worry of how their compensation is affected. There is no decrease in our income if you withdrawal $250,000 from your investments to pay off the loans. The advisor who charges an AUM fee cannot say the same. This is an unfortunate conflict to such a popular fee model, but one that we avoid with a fixed fee model.

Hourly Advice vs. Commissions

There are many incentives available to financial advisors to push a certain product or service on a client. The commission structure is mostly prevalent in the insurance business where an agent receives a commission on the sale of an insurance contract. The conflict of interest arises with the choice of which insurance or annuity product to recommend or how much insurance to recommend as this advice could be driven by the commission to be received. The same is true for certain investment products and funds.

The first test is to ensure that you are dealing with a registered investment advisor and not a broker. A broker is not required to provide advice in your best interest or put your financial well being above theirs, also known as fiduciary duty. So if a broker recommends Fund A for your portfolio, you don’t know if Fund A is truly the best option for you or if Fund A is just paying a bigger commission to the broker.

We do not accept any commissions. You only pay a fixed fee for advice based on the complexity of the plan. This ensures that the advice given is not being swayed by some payout from a third party.