Case Studies in Unconventional Financial Planning Billing

The traditional financial planning billing model gives you two options for generating revenue:

• sell an annuity or some other similar commissioned product, or
• collect an asset management fee for managing a client’s Investment Portfolio.

For many financial planners—or at least those who consider themselves real financial planners—the first option isn’t even an option. If the end goal is to help someone, you’re not going to accomplish that by selling a product for a commission. Why? Because all products sold for a commission—at least those I’ve seen—are nothing I would ever recommend to a client (but as a fee-only financial planner, I am, of course, biased).

Assets Under Management (AUM) Billing

If you’re not going to sell a commissioned product, the assets-under-management model is the only remaining billing option. If you are a fee-only advisor, the vast majority of your revenue likely comes from billing for assets under management (AUM), and for good reason: the AUM billing model eliminates many of the conflicts of interest that come with selling products, with the added benefit of AUM billing being less salient.

But the nature of the AUM billing model means that financial planning services become exclusive to those individuals with a large enough investment portfolio for the economics to make sense to the advisor. This is why investment portfolio minimums of $1,000,000 are so common.

Fee-Only Billing Alternatives for Financial Advisors

So what do you do if you want to work with clients and truly help them (i.e. not sell them commissioned products), but those clients don’t have a large enough investment portfolio from which to bill?

Hourly billing is one option. Sheryl Garrett of the Garrett Planning Network may be one of the first—or at least the most widely known—individuals who popularized billing for financial planning on an hourly basis.

However, this model also has its challenges. If the client paying for work by the hour has a question for their financial planner, that client may weigh the value of his/her question against the fee he/she will pay to have that question answered—perhaps rightly so. Some financial planning questions may be so mundane, they don’t warrant being asked.

But there are also those important issues that clients don’t even recognize as important simply because they don’t know. A client can be unaware of the impact of their financial decisions. Perhaps he/she can’t comprehend the consequences of holding a floating-rate mortgage, or misunderstands that the tax benefits of leasing a vehicle may not necessarily outweigh the higher after-tax cost of buying something less expensive.

The hourly billing model may also prohibit financial planners from doing important financial planning analysis—such as disability insurance review—because the client doesn’t understand the importance of such insurance, so they don’t want to pay for the work. Consider the following scenario:

A millenial client comes to a financial planner asking for an investment analysis. Being a good financial planner, he/she suggests a disability insurance analysis. Result: the client feels upsold.

And while it may be an upsell, it is nonetheless important work. What good is an optimized 401(k) allocation if you’re no longer able to contribute to it because of disability?

In the end, there’s still the issue that you won’t be able to help a client as comprehensively on the hourly billing model, as it presents challenges to the execution of comprehensive financial planning. Fortunately, an alternative billing model exists—one that attempts to address many of the shortcomings of the above models.

Flat Retainer Billing for Financial Planning

Michael Kitces and Alan Moore of the XY Planning Network are likely the biggest champions of the retainer billing model. (They even wrote a book on it!) They make a strong case for using retainer billing; charging a flat fee for your time is a valid idea.

The flat retainer model attempts to solve some of the issues with the hourly—and for that matter, every other—billing model. By charging a flat fee, you as the advisor are able to theoretically address all your clients’ issues without them ever having to think about the additional cost of asking successive questions.

However, this model still has challenges of its own. Interestingly, the challenge of this model is not a conflict of interest (as with commissioned sales) or incomplete financial planning (as with hourly billing).

Case Studies of Flat Retainer Billing

At Define Financial, we played with retainer billing with mixed success. Fortunately, we were able to learn valuable lessons about why certain ideas failed.

Financial Planning Flat Retainer Billing v. 1.0

Lesson Learned: You Have to Charge a Relatively Substantial Fee

Our first experiment in flat retainer billing was to charge clients $100/month for unlimited financial planning. (Investment management services were a separate and distinct service.)

We tried this out with two very different clients:

• Female, Millennial, W-2
• Male, Gen-X, Entrepreneur and Rental Property Manager/Owner

As different as these two clients were, the results were quite similar. In the beginning, they were both engaged in the process. We started with an investment analysis (because the clients expressed that this was their burning priority) and successively did a retirement plan analysis for the millennial.

After that, both clients went radio silent. Repeated outreaches to follow up on other areas of financial planning (insurance review, etc.) resulted in the clients either not responding to messages or never supplying the documents needed for the financial planning process to continue. And during their entire radio silence, they continued to pay the $100/month fee (billed monthly via credit card). This experiment lasted for approximately two quarters, after which both clients decided they were no longer interested in our services. The services were terminated and the subscription was canceled.

The lesson (we think), highlighted above in bold, is that the price for financial planning has to be substantial (i.e. high) enough for the client to be engaged. We have hypothesized that a price point too low means that someone may not be taking the financial planning process seriously. In order to guarantee client engagement, we have to charge enough money for the client to enroll only if he/she sees immense value in the process and plans to get something out of it.

Financial Planning Flat Retainer Billing v. 2.0

Lesson Learned: Two Clients are Twice as Much Work as One (Duh)

With the idea in mind that we needed a substantial upfront fee to weed out the pretenders, we offered a new model: a one-time financial plan for a flat fee that covers specific areas of financial planning. The challenge of this billing model was striking a balance between:

• a fee high enough to get prospective clients to think twice about paying for it without being committed to the process;
• a fee low enough to be affordable; and
• limiting the scope of the financial planning engagement so that we would not end up with “unintended pro-bono” financial planning, i.e. doing so much work that we end up working for free (credit to Scott Frank for coming up with this fun and extremely relevant term).

In the end, we decided that $1,500 met all of the above, with the scope of our financial planning work limited to three areas:

• Investment Analysis,
• Insurance Analysis (Life, Disability, Liability, etc.), and
• Retirement Analysis.

To date, we have completed four financial plans for $1,500 each (with a fifth in progress). And while doing a $1,500 plan for a single individual with (mostly) grown adult children is relatively simple, the opposite is the case for a dual-income household. As you likely well know, a single individual doesn’t usually require much (if anything) in the way of a life insurance needs analysis because they normally have no dependents. However, working with a dual-income household means:

• Two life insurance needs analyses,
• Two disability insurance needs analyses, and
• Two (or more) employer retirement plans to review.

In short, working with a dual-income household means substantially more work simply because it takes more time. Therefore, financial planning work for a dual-income household needs to be priced accordingly. Otherwise, you end up doing unintended pro-bono financial planning.

Flat Retainer for Ongoing Planning

However, even underpricing your financial planning services for the initial engagement (i.e. the $1,500 plan) might be appropriate given the second part of this process: offering ongoing financial planning for a flat monthly fee.

Here’s how this works: at the conclusion of our financial planning process, we provide the client with his/her list of To-Dos (e.g. purchasing an umbrella policy or changing their investment portfolio so as to utilize lower-cost funds). We store this list of To-Do tasks in the client’s emX portal. Once we deliver the financial plan with our recommendations, we offer the client the following choices:

1. do this on your own, or
2. hire us to help cross off your To-Dos.

In this way, even if the $1,500 planning fee becomes a loss leader, we may come out ahead with the ongoing planning fee (discussed shortly). Given our firm’s obsessive-compulsive nature, we simply can’t help but put 25 hours or more into a financial plan. But if the client opts to pay for the ongoing planning fee, utilizing the $1,500 plan as a loss leader may make sense. What really matters is the close ratio: how many folks enroll for $1,500 plan and continue to work with us, paying a flat monthly fee.

Currently, three out of five financial planning clients who paid the flat fee opted to pay a monthly fee for ongoing financial planning, which includes investment management.

Financial Planning Flat Retainer Billing v. 3.0

While some single individuals are still offered $1,500 for a financial plan, couples will be charged $3,500 (the original price point for all financial plans before we started experimenting with pricing). When it comes to a couple, even $3,500 is still somewhat of a loss leader given the number of hours we put into creating our financial plans. (On a long enough timeline, we will be able to increase efficiency as we refine our financial planning process and get the number of hours down.)

It will be extremely interesting to see the level of success with this financial planning billing model over time. I’m especially curious about the scalability and profitability of this model as the sample pool grows. As I mentioned, right now n=5, but once n=30, we’ll get closer to really understanding the viability of this model.