Comments on: Financial Advice: Hourly Fees, Asset-Based Fees, or Annual Fee?

By: Jim Stackpool

Jim Stackpool — Thu, 28 Jan 2010 22:10:41 +0000

As a client, the bottom line on determining ‘value’ when buying advice, shouldn’t by judged by the amount of effort provided (i.e. hours) or products bought (i.e. investments). It should be determined by you achieving greater certainty and better outcomes in your financial life. If neither of these are occuring, it’s simple – the fee isn’t worth it.
What is a good and fair fee for advice?
It’s a fee that give you believe is fair for the certainty and financial outcomes you seek. As markets continually change, as your financial circumstances continually change, as laws governing distribution of financial products and advice continually change and as new financial products and services continually appear, clients need on-going certainty that their financial dreams, hopes and ambitions have the greatest change of being achieved.
We’re advocates of retainers, not hourly rates, not percentages of assets that aren’t fixed (sometimes you hit rock and the initial assumptions on which the retainer were developed were incorreect) but agreed at least annually between adviser and client.
We might be wrong, but we know that rewarding hourly rates, or slicing a lazy percentage off the product has no direct link with providing people with greater certainty.

Jim Stackpool
Strategic Consulting & Training Pty Limited
twitter@jstackpool
Author of “What Price Advice”
http://www.scat.com.au

By: Larry

Larry — Thu, 28 Jan 2010 14:23:29 +0000

John Gay writes, “The one problem with the ‘do-it-yourself’ approach is that you may not know what you don’t know.”

Point taken. But the question is how much I would be paying to learn something I “may” or “may not” know already through other reading. There’s a tremendous amount of information available either free or low-cost through the Internet and the bookstores. I can spend $6 for Otar’s retirement book and only $99 for his full-featured calculator. I can spend $15 apiece for the Boglehead books. I can get free advice via the Internet, and it cannot necessarily be assumed unreliable.

Right now I am 5-6 years from retirement and would not mind spending $500-1000 for a one-time consultation with an advisor in the hopes that it would give me insights I don’t have. But I would not want to spend much more. Just as with investments, fees matter, and they add up. And yet (without naming names) there’s one advisor active on Boglehead who preaches the wisdom of low investment costs, has published books on the matter, but then turns around and charges a minimum of $500 per quarter in his own practice and .025% for accounts over $800K. This is still $2000 per year: 1/3 of the allowable IRA contribution for people over 50, and 2% of a $100K portfolio.

Which leads me to the other objection I have to this fee structure: charging people with smaller portfolios proportionately more. It’s as if those with more limited resources, who have less room for error and might be the most in need of good advice, are to be hit for a higher percentage of their assets than a millionaire who can more easily absorb the charges. I don’t like that at all.

By: Rick Francis

Rick Francis — Thu, 28 Jan 2010 14:19:43 +0000

Mike,

I have to agree an hourly fee appeals to me the most. MaryS’s comment on this article made me think that the biggest problem is finding an advisor that will give solid investment advice. I wrote a post on how I would choose a financial advisor:
http://ponderingmoney.com/2010/01/28/how-i-would-choose-a-financial-advisor/

I came up with some tough questions to ask the advisor that should weed out the salesmen and find someone that might be worth paying. If you can find a few candidates then compare the rates. You could go to an insurance salesman for free financial advice- however it is likely to cost you a fortune in the long run.

-Rick Francis

By: Daddy Paul

Daddy Paul — Thu, 28 Jan 2010 03:54:13 +0000

After dealing with a commission based advisor I decided I was going to become educated enough to manage my own money. It was the smartest move I ever made. Now I want to tell everyone what I know so they do not get taken to the cleaners.

By: Ken

Ken — Thu, 28 Jan 2010 03:18:55 +0000

While I have never consulted with a financial planner, the fee only route seems better to me. I don’t like sales pitches just solid strategies and recommendations.

By: Larry

Larry — Wed, 27 Jan 2010 23:36:57 +0000

Personally, I charge a flat fee

And what is your flat fee?

By: John Gay, CFP®

John Gay, CFP® — Wed, 27 Jan 2010 21:55:51 +0000

Nice piece. From a practitioner standpoint, I have concluded that there is no perfect fee schedule. Personally, I charge a flat fee, which I think is preferable to an hourly fee because of my client base. I am a generalist, not a specialist. I make every attempt to apply as much work, time, and research in a way that applies to as many clients as possible. In an hourly context, it’s then difficult to bill for such time.

For example, I recently wrote a ten page brief (not so brief!) on Roth IRA conversions. I am having discussions about this with all of my clients. Because of the flat fee, the energy and time was spread across my client base in what I believe is a fair way. For practitioners that are considered “specialists,” in which every client is dramatically different, an hourly fee is arguably fair since each client pays their share of the load. Other issues arise, though, such as “what is billable time?” I also don’t like clients to feel like I’m starting an egg timer every time they call me.

Also, I operate in a “non-discretionary” environment, in partnership with Folio Investing which allows me to “look over a client’s shoulder” without them having to sign over power of attorney to me. I hope that the financial advisory world moves more in that direction.

The one problem with the “do-it-yourself” approach is that you may not know what you don’t know. The Roth IRA conversion issue is a good example. Most journalists and financial institutions just don’t get the factors that drive the decision. I’m a smart guy and could probably fix my own toilet if I spent the time and energy to learn how. Then again, I might mess up or skip a step and be worse off than when I started. Just because something isn’t rocket science doesn’t mean I’m best served doing it on my own.

Keep up the good posts!

By: Larry

Larry — Wed, 27 Jan 2010 21:51:56 +0000

If you’re able to find another advisor whose advice is every bit as good–and whose fee would only total 0.5% of your portfolio–wouldn’t that be preferable to using the advisor with the 1% fee?

If you have a $500K portfolio, even .5% is $2500. (And what, annually?) If the advisor has 100 clients, that won’t buy a yacht, but it could buy a nice boat or small house at my expense. Phooey, say I. If I’m paying Vanguard .2% ($1000 annually) for a portfolio I’ve already set up on my own, why should I want to boost my expenses to .7% or $3500? What am I getting that I wouldn’t get from the Bogleheads books or the forum?

By: RetirementInvestingToday

RetirementInvestingToday — Wed, 27 Jan 2010 21:36:47 +0000

I hunted around and met with asset based and hourly feed advisers. Personally I became disillusioned with it all and decided to keep all the fees myself and go it alone. The book title ‘Where are the customers yachts’ also made me think twice.

This forced me to educate myself, make some mistakes along the way and I now feel I’m a better person for it. I’m fully in control of my own actions and if it fails I only have myself to blame.

By: ctreit

ctreit — Wed, 27 Jan 2010 20:30:58 +0000

This is a good list that highlights the conflicts of interest most advisers are exposed to. This is why it is very important that you pick a payment scheme and a financial planner that make you comfortable. Your gut is probably a good guide. I don’t think that there is one right answer to which way to go since financial planning is really about the individual for whom the financial planning is drawn up. What works for one person does not work for another. What would you suggest should be part of an individual’s decision making process?