Two recent episodes in setting financial planning fees merit sharing, and both have the same ultimate take-away: don’t think you’re not worth it – because the right clients think you are.
I’ve previously written about Define Financial’s attempts to implement unconventional billing models for financial planning. Allow me to elaborate on those of the case studies mentioned in that post, specifically part of Financial Planning Flat Retainer Billing v. 2.0, or our second attempt at creating a workable monthly retainer model.
Financial Planning Billing Case Study #1
We produced a one-time financial plan for a couple for $1,500. As is customary with our process then (and now), we presented the clients with our list of recommendations at the conclusion of the financial planning process – as well as offered to help them accomplish these recommendations for an ongoing fee.
(Also, know that our monthly retainer includes asset management. So, whether a client has $10,000 to invest or $100,000 – the service of asset management is included when our monthly retainer fee is paid.)
Still early in our attempts to implement monthly retainer billing, we second guessed ourselves. Instead of sticking with our offering of $250/month for ongoing financial planning, we offered the client a second option: AUM billing. The reason for this was because the clients were close to the firm’s AUM minimums ($300,000) – and while AUM billing today would not provide for our fee minimum of $3,000, we assumed that given the client’s existing assets and their voracious savings rates, they would hit the $300,000 mark soon. We explained this offering to the clients and they accepted the 1% fee.
As we moved forward with implementation, we came to the conclusion that the ultimate AUM would be far below the $300,000 that we had roughly anticipated (for uninteresting myriad reasons). As a consequence of this miscalculation, we were now looking at earning a much smaller fee than initially anticipated. As such, we had a fork in the road before us:
- Suck it up and live with the relatively smaller financial planning fee, or
- circle back to the client and ask them to approve a higher fee than they had initially agreed to.
Bear in mind that we had just agreed to the current fee with the client. Updating the fee was not an issue of inflation eating away at the real price of the fee after some years. We were looking at adjusting their fee after we had reached a consensus with them just days earlier.
We were troubled. What would we do? How would the client react? Should we even bother? The entire experience was very, very troubling. We were quite hesitant to go back to the client. We were unsure if they would approve such a relatively large increase in a fee given such a short amount of time. We were unsure if the client would deem our financial planning services as valuable so as to pay the higher rate.
Eventually, we decided to circle back to the client, to ask for the higher fee. We set up a phone call with them. During the call, we explained the issue and process in harrowing detail. Suffice it to say, we were quite nervous. What was the client’s response to all of this? “Sure!”
Geez! The easy-going response from the client was in stark contrast to the amount we stressed about the issue. To the client, we were well worth the increase in the fee. They already knew and understood the caliber of our work (because we already had created a one-time financial plan for them). For the clients, the change in fee was a non-issue.
The takeaway: your fee is likely reasonable (and you may even be underpricing yourself). If the client knows and understands your value, they will be happy to pay a reasonable fee. If not, they are not the right client.
Financial Planning Billing Case Study #2
Assets but But Troubled Cash Flow
A recurring challenge I have witnessed with many older clients is
- a lack of control over cash flow (i.e. having money left over at the end of the month), in the presence of
- a large investment portfolio.
That is, the clients simply do not have the cash flow to support a monthly retainer model. They are living paycheck-to-paycheck. However, the client may have several hundred thousand dollars in investable assets (which could be billed from via conventional AUM billing).
As such, these types of clients are likely poor prospects for the monthly retainer model. If they spending all $200,000 of their income every year, they won’t be able to pay you $3,000 for your annual retainer. (That is unless of course, they make lifestyle changes.)
(“How does someone end up in this situation,” you may ask. It’s because the client lacks budgeting skills – and their investable assets have come from either automated retirement savings (like a 401(k)), an inheritance, or from a divorce.)
Now, if you still want to work with these types of clients (those with cash flow problems but a robust investment portfolio), you can offer traditional AUM billing. This may not be an optimal solution – especially if you’re not a fan of AUM billing – but it may be better than the alternative: not working with the client at all.
AUM Billing Case Study
In this case study, the near retiree was 69 years old. She had paid $1,500 for a one-time financial plan. And now it is time to figure out the next step of the process: how to implement the recommendations and if my services were warranted – and how to bill for them.
One of the reasons that I don’t like AUM billing is that at 1%, I think the fee drags on investment returns. The arguable success of robo-advisors charging between 0.25% and 0.30% speaks to this. (Of course, you get what you pay for – but I won’t go down that rabbit hole of a topic at this time.) In this particular scenario, 1% was startling too high (I thought) because I had previously had conversations with the client’s son about this previously. (The client’s son is heavily engaged in his mother’s financial plan. Don’t worry – I have an authorization discussion signed on file.)
The client’s son – like myself – knows and understands the impact of fees on investment returns. So, my initial concern was that he – on behalf of his mother – would balk at a 1% AUM fee to pay for ongoing financial planning. However, 1% of her assets that I could manage today was actually a relatively small amount: roughly $1,400. This is because the vast majority of the client’s assets were tied up in employer plans. Of course, paying 1% on ~$140,000 meant getting not just investment management services on that $140,000 but also financial on the entirety of her life – which would include an additional ~$700,000 in assets under advisement (AUA) in her employer plan.
But, 1% was still 1% – which is to say, a big drag on investment portfolio returns. Though this 1% translated to just $1,400 a year for ongoing financial planning, I was still hesitant to ask for 1% (and was already confident that a monthly retainer wasn’t an option given the client’s challenge with cash flow.)
As with the previous case study, I had a perhaps-too-long explanation with the client’s son reviewing the issue. Again, I was nervous. Was I worth 1%? He knew and understood the value of compounding. Did the quality of my work warrant the fee?
His response was remarkably similar to the previous case study. Sure. That sounds fair.
The Right Clients Will Pay Your Fee Because They Understand Your Value
In the end, we are still very well underpricing ourselves. But the takeaway is that the clients aren’t as skeptical of our fee as we are.
I think of a story shared by Scott Frank about Carl Richards, that Carl Richards once shared with Scott. Richards felt that he was doing too many speaking engagements. He was tired of the travel requirements and wanted a little bit of a break. As such, he instructed his assistant to double his speaking honorarium. The result? Richards now had more bookings than the year before.