Hourly vs. retainer for a financial planner

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
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Greenman72
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Hourly vs. retainer for a financial planner

Post by Greenman72 »

I've mentioned on here that I'm a CPA in a tax practice, and I'm also a registered rep. (Please hold your applause.) I'm also a PFS and CFA, and as such, I can offer "financial advice" through my RIA. And after tax season, I plan to start offering financial planning services to our clients.

(Just to note--since I'm an accountant, I can use the accountant's exclusion as long as the advice is "incidental to the practice of public accounting". However, that only goes so far. EG - I can tell a client that municipal bonds are not subject to tax, but I cannot recommend an asset allocation or a specific mutual fund. That is outside the realm of "public accountancy".)

I plan to use the "financial planning" umbrella to do everything that is not specific to portfolio management (asset allocation, asset location, security selection, and monitor & rebalance). This includes:
- estate planning (will, living wil, HIPAA, durable POA, medical POA, financial POA, etc.)
- retirement planning (estimating retirement budget, creating a savings plan, monitoring progress, spending strategies)
- Social Security optimization (both in advance AND at the point of retiring)
- insurance analysis (I have both a life & health AND a property & casualty license)
- Elder planning (TBH, I have very little experience or knowledge in this area)
- Philanthopy (split interest trusts, qualified charitable distributions, donations of appreciated stock)
- Intergenerational wealth transfers (estate tax planning, postmortem tax planning)
- Business succession (buy-sell agreements, key man life insurance)
- Miscellaneous, but oft-overlooked things (e.g. beneficiary designations and 401k optimization)

My question to the community is this--if you were my client, would you rather pay a once-a-year retainer fee? Or would you rather pay a straight hourly fee?

Retainer - The retainer would be high in the early years, because we have to hash out all these details and actually implement parts of the plan. Later on, when we are on cruise control, and all we are doing is reviewing and making incremental changes, the retainer would be relatively small. But it would remain fixed for the duration of the year. And in some years, that would mean that I get more out of the deal, and some years the client gets more. But the client would be less focused on the "hourly bill", so they might be more inclined to engage me, thus benefitting them in the long run. (And it benefits me, because I know what my yearly revenue is going to be.)

Hourly - Like the retainer, it would probably start high and eventually decrease. And it keeps things straight--the client gets only what they pay for--no more and no less. But they might look at the $175/hr bill and say, "You know what, I don't need Greenman to review my estate planning documents. After all, nobody has died or gotten divorced. No need to pay him money to do nothing." (Nevermind the fact that the estate tax exclusion changed, which changes the entire strategic planning of your estate. Nevermind the fact that daughter turned 18, which necessitates a medical/financial/durable POA. Nevermind the fact that your term life insurance expired two years ago, and now you're naked.)

Just looking for comments or opinions.
Last edited by Greenman72 on Sat Apr 06, 2019 3:24 pm, edited 2 times in total.
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fortfun
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Re: Hourly vs. retainer for a financial planner

Post by fortfun »

I'd rather pay hourly and I think that is the general consensus on this forum. However, you are trying to make money and have a different interest in mind. Your customers likely won't be boglehead minded clients.
Last edited by fortfun on Sat Apr 06, 2019 10:55 am, edited 1 time in total.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

p.s. Yes, I do plan to manage my clients investable assets at standard rates (i.e. 1% for the first two million and scaling down from there). Yes, I do plan to sell Variable Annuities and Variable Universal Life when appropriate. Yes, I plan to sell A-shares of mutual funds, when appropriate. I've discussed this before on this site. I'm not going to change my mind and you're not going to change yours, so let's just completely omit the whole debate about whether advisors are worth paying for.

However, I would welcome opinions or comments about how fees from one service should offset fees from another. Or whether or not I should allow people to manage their investments themselves or keep their "legacy advisor" and charge them a de-facto AUM fee.
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Re: Hourly vs. retainer for a financial planner

Post by SevenBridgesRoad »

Greenman72 wrote: Sat Apr 06, 2019 10:54 am p.s. Yes, I do plan to manage my clients investable assets at standard rates (i.e. 1% for the first two million and scaling down from there). Yes, I do plan to sell Variable Annuities and Variable Universal Life when appropriate. Yes, I plan to sell A-shares of mutual funds, when appropriate. I've discussed this before on this site. I'm not going to change my mind and you're not going to change yours, so let's just completely omit the whole debate about whether advisors are worth paying for.

However, I would welcome opinions or comments about how fees from one service should offset fees from another. Or whether or not I should allow people to manage their investments themselves or keep their "legacy advisor" and charge them a de-facto AUM fee.
Seems a bit like going to a vegetarian forum and saying, let’s set aside the whole meat eating debate and just tell me how much meat should I be eating?
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Re: Hourly vs. retainer for a financial planner

Post by Stinky »

Greenman72 wrote: Sat Apr 06, 2019 10:54 am p.s. Yes, I do plan to manage my clients investable assets at standard rates (i.e. 1% for the first two million and scaling down from there). Yes, I do plan to sell Variable Annuities and Variable Universal Life when appropriate. Yes, I plan to sell A-shares of mutual funds, when appropriate. I've discussed this before on this site. I'm not going to change my mind and you're not going to change yours, so let's just completely omit the whole debate about whether advisors are worth paying for.

However, I would welcome opinions or comments about how fees from one service should offset fees from another. Or whether or not I should allow people to manage their investments themselves or keep their "legacy advisor" and charge them a de-facto AUM fee.
At the very least, I suggest you offset with 1% AUM fee with any commissions you receive on selling VUL, VA, or A shares. At least that way the client isn’t paying twice for your services.

Maybe that’s not the norm in the industry - I just don’t know. But it just seems “right” to me. After all, you’re asking this question on a Boglehead forum.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

^For a VA, a client wouldn't pay twice for the same thing. You either get a commission or an AUM fee, but not both.

I have no idea how I get paid for a VUL. I have never sold one. Generally, I try to steer people to their employer first, or if that's not enough, to a term product. Permanent life insurance should be used sparingly, IMHO.

In practice, if I were to discount something, I would probably start with the financial planning fees. They are easier to control than the investment fees.
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Re: Hourly vs. retainer for a financial planner

Post by 123 »

With being a CPA with a tax practice and holding a CFA you have among the strongest professional credentials out there. From my perspective your biggest challenge is getting in the networking area with the "big fish" in your community. Your efforts would be best rewarded if you can focus activities on securing clients with assets of $5M+. Are you in a major metropolitan area or are you in a suburban area? Do you have connections with any country clubs/private clubs/professional business organizations?
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Re: Hourly vs. retainer for a financial planner

Post by donaldfair71 »

Once a year retainer a la Mark Zoril. At about that price point, too ($96/yr).
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

^I looked that up and found his website. Looked at it for about one minute.
It seems like for $100, you get access to eMoney. That is, he pays $3k for it, then gives a lot of people access for $100 each.
It sounds like a case of "get what you pay for". It provides some already-savvy clients with some software to help them navigate some of the math. But no interaction with any human. (But I could be wrong.)
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

123 wrote: Sat Apr 06, 2019 11:58 am With being a CPA with a tax practice and holding a CFA you have among the strongest professional credentials out there. From my perspective your biggest challenge is getting in the networking area with the "big fish" in your community. Your efforts would be best rewarded if you can focus activities on securing clients with assets of $5M+. Are you in a major metropolitan area or are you in a suburban area? Do you have connections with any country clubs/private clubs/professional business organizations?
I am on an island in West Texas, in one of the richest communities in the US. But I am the world's worst networker. I am definitely a blue-collar guy in a white-collar profession. I don't play golf, I shun country clubs, I don't wear Cartier, I don't drive BMW, and generally feel uncomfortable around the creme-de-la-creme.

I prefer to stay in the $1-10m range. This seems to be the "sweet spot" where I can really make a difference. Less than that, and I can't really help all that much. More than that, and you probably want somebody more sophisticated. (I don't know that more sophisticated = better, but people with $25-50m in assets don't like the "three fund portfolio".)
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Re: Hourly vs. retainer for a financial planner

Post by Rick Ferri »

There are dozens of highly qualified investment advisers who are now charging low fees for portfolio management. In my recent "Bogleheads on Investing" podcast with Allan Roth, we discussed 0.3% as the maximum AUM fee clients should be paying for portfolio management and some advice. Many firms are converting from AUM to flat fees of between $2,500 and $3,500 regardless of portfolio size.

You get what you DON'T pay for. ~ John Bogle

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Re: Hourly vs. retainer for a financial planner

Post by GCD »

Hourly vs. Retainer. OP, you make good points about things that can go unnoticed when paying an hourly rate. The answers you get will be dependent on how knowledgeable people are.

In my own experience, I have not found an hourly fee guy who was not incredibly young, inexperienced and ignorant of things I want expert advice on. All the older, experienced guys who seem to know what they are doing, at least in an initial consult, simply don't do hourly work. When I look at the package of services that come with the retainer there are always a bunch of services I find useless. For example, my wife is a retired IRS agent and she handles our tax return. I don't need someone else to do our taxes. Yet "free" tax returns are always included in the package deal. For someone else it might be something different, but the package is never, IME, filled with more than 50% services that I am interested in.

I also have zero interest in paying someone to tell me what my AA should be.

I would not pay you a retainer. That doesn't mean you won't find plenty of clients who will. I'm sure I am enough of an anomaly that it is not worth building a business model to attract people like me.
Last edited by GCD on Sat Apr 06, 2019 12:28 pm, edited 1 time in total.
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

Rick Ferri wrote: Sat Apr 06, 2019 12:25 pm There are dozens of highly qualified investment advisers who are now charging low fees for portfolio management. In my recent "Bogleheads on Investing" podcast with Allan Roth, we discussed 0.3% as the maximum AUM fee clients should be paying for portfolio management and some advice. Many firms are converting from AUM to flat fees of between $2,500 and $3,500 regardless of portfolio size.
Rick,
Are these people actually getting true "comprehensive financial planning" for $3,000? I doubt it. They are probably getting an asset allocation and a yearly rebalance. Hardly my definition of "financial planning".
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Re: Hourly vs. retainer for a financial planner

Post by 123 »

GCD wrote: Sat Apr 06, 2019 12:27 pm ... I don't need someone else to do our taxes. Yet "free" tax returns are always included in the package deal...
I believe the point of offering tax services is to gain insight into all of the customer's assets to better exploit commission and sales opportunities.

Edited to add:

And providing tax services is an excellent way to lock-in a customer in the same way the banks want you to have a checking account with them. It's a central indicator of "loyalty". Once people abdicate their tax preparation responsibilities to someone else they are reluctant to take it back upon themselves and just as reluctant to search for an alternate preparer.
Last edited by 123 on Sat Apr 06, 2019 12:45 pm, edited 3 times in total.
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Re: Hourly vs. retainer for a financial planner

Post by GCD »

Greenman72 wrote: Sat Apr 06, 2019 12:31 pm
Rick Ferri wrote: Sat Apr 06, 2019 12:25 pm There are dozens of highly qualified investment advisers who are now charging low fees for portfolio management. In my recent "Bogleheads on Investing" podcast with Allan Roth, we discussed 0.3% as the maximum AUM fee clients should be paying for portfolio management and some advice. Many firms are converting from AUM to flat fees of between $2,500 and $3,500 regardless of portfolio size.
Rick,
Are these people actually getting true "comprehensive financial planning" for $3,000? I doubt it. They are probably getting an asset allocation and a yearly rebalance. Hardly my definition of "financial planning".
$3,000 is actually exactly what a CPA/JD wanted to do financial planning and our taxes and give us advice on estate planning and a yearly checkup. I've forgotten now what all he offered, but it was a lot more than AA and a yearly rebalance. I wouldn't take his package either because it included too much stuff I didn't want.

The problem is your potential client base isn't Bogleheads and you are asking BH what they think of it. Most people here don't want what you are selling and I thought someone who was more qualified than you and offered more than you still wasn't a good deal at $3K.

I think you have a profitable and functional business model. Lots of people buy it. You will probably do very well financially. You just won't have BH for a large percentage of your client base.
Last edited by GCD on Sat Apr 06, 2019 12:41 pm, edited 1 time in total.
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Re: Hourly vs. retainer for a financial planner

Post by Rick Ferri »

According to an annual review done by Michael Kitces, a comprehensive financial plan written by an experienced CPF takes about 15 hours and cost about $3,500. This is a one-time cost. No-one needs a financial plan every year and no one should be paying for one with their adviser charging 1% annual AUM fee every year.

The proper way to charge a client is by the actual work done. My view is a 0.25% management fee for assets and everything else charged as a project or hourly. The first year a $1mm client might pay $6,000 and after that $2,500 for portfolio management and perhaps another $1,000 for fees relating to updating their plan. That's fair to a client.

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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

GCD wrote: Sat Apr 06, 2019 12:38 pm I think you have a profitable and functional business model. Lots of people buy it. You will probably do very well financially. You just won't have BH for a large percentage of your client base.
No doubt. I'm not coming here to advertise. I'm coming here because I value the opinions of some of the people here. Rick Ferri is one of them. (Thanks for sharing, Rick.)

Some of the others include nisiprius, Financialdave, Random Walker, and Spirit Rider (just to name a few).
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Re: Hourly vs. retainer for a financial planner

Post by Dottie57 »

Hourly does not mean cheap.

There should be a minimum number of hours. List of what will be done. Client needs to provide spending for last 12 months (minimum), assets (statement for all accounts) and status of any debts.

This is a list from a friend who used a fee only advisor.
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Re: Hourly vs. retainer for a financial planner

Post by FoolStreet »

Greenman72 wrote: Sat Apr 06, 2019 11:42 am ^For a VA, a client wouldn't pay twice for the same thing. You either get a commission or an AUM fee, but not both.

I have no idea how I get paid for a VUL. I have never sold one. Generally, I try to steer people to their employer first, or if that's not enough, to a term product. Permanent life insurance should be used sparingly, IMHO.

In practice, if I were to discount something, I would probably start with the financial planning fees. They are easier to control than the investment fees.
I was surprised to read you say that you would sell VUL for insurance purposes. I always thought that agents sold VUL for the investment incentives. You would get a larger commission selling a VUL for an IRA rollover than as part of a monthly payment for insurance purposes. I mean, the commissions on selling a 2-500k VUL from an IRA at one go compared to $350-500/mo.

Either you really are still one of the good ones if you are only using VUL for insurance needs. Or you don’t yet “recognize the POWER of the dark side!” Ha ha ha
Last edited by FoolStreet on Sat Apr 06, 2019 1:06 pm, edited 1 time in total.
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Re: Hourly vs. retainer for a financial planner

Post by Rick Ferri »

Having a financial plan created by a qualified planner isn't an ongoing exercise. There can be a high one-time charge based on the complexity of a case, but after that, minimal time is needed to update a plan.

I am not a financial planner and do not do financial plans. This is my observation of the industry today.

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Re: Hourly vs. retainer for a financial planner

Post by livesoft »

Another hook for the OP is to say, "I'll be around when you pass away and can make sure your spouse has the financial things set up for them in their time of need." Now I suppose one wouldn't use exactly those words, but many people on this forum have mentioned this is a real fear that they have.
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Re: Hourly vs. retainer for a financial planner

Post by FoolStreet »

Greenman72 wrote: Sat Apr 06, 2019 10:48 am I've mentioned on here that I'm a CPA in a tax practice, and I'm also a registered rep. (Please hold your applause.) I'm also a PFS and CFA, and as such, I can offer "financial advice" through my RIA. And after tax season, I plan to start offering financial planning services to our clients.

(Just to note--since I'm an accountant, I can use the accountant's exclusion as long as the advice is "incidental to the practice of public accounting". However, that only goes so far. EG - I can tell a client that municipal bonds are not subject to tax, but I cannot recommend an asset allocation or a specific mutual fund. That is outside the realm of "public accountancy".)

I plan to use the "financial planning" umbrella to do everything that is not specific to portfolio management (asset allocation, asset location, security selection, and monitor & rebalance). This includes:
- estate planning (will, living wil, HIPAA, durable POA, medical POA, financial POA, etc.)
- retirement planning (estimating retirement budget, creating a savings plan, monitoring progress, spending strategies)
- Social Security optimization (both in advance AND at the point of retiring)
- insurance analysis (I have both a life & health AND a property & casualty license)
- Elder planning (TBH, I have very little experience or knowledge in this area)
- Philanthopy (split interest trusts, qualified charitable distributions, donations of appreciated stock)
- Intergenerational wealth transfers (estate tax planning, postmortem tax planning)
- Business succession (buy-sell agreements, key man life insurance)
- Miscellaneous, but oft-overlooked things (e.g. beneficiary designations and 401k optimization)

My question to the community is this--if you were my client, would you rather pay a once-a-year retainer fee? Or would you rather pay a straight hourly fee?

Retainer - The retainer would be high in the early years, because we have to hash out all these details and actually implement parts of the plan. Later on, when we are on cruise control, and all we are doing is reviewing and making incremental changes, the retainer would be relatively small. But it would remain fixed for the duration of the year. And in some years, that would mean that I get more out of the deal, and some years the client gets more. But the client would be less focused on the "hourly bill", so they might be more inclined to engage me, thus benefitting them in the long run. (And it benefits me, because I know what my yearly revenue is going to be.)

Hourly - Like the retainer, it would probably start high and eventually decrease. And it keeps things straight--the client gets only what they pay for--no more and no less. But they might look at the $175/hr bill and say, "You know what, I don't need Greenman to review my estate planning documents. After all, nobody has died or gotten divorced. No need to pay him money to do nothing." (Nevermind the fact that the estate tax exclusion changed, which changes the entire strategic planning of your estate. Nevermind the fact that daughter turned 18, which necessitates a medical/financial/durable POA. Nevermind the fact that your term life insurance expired two years ago, and now you're naked.)

Just looking for comments or opinions.
I tend to think a fairly priced subscription would be reasonable. I would want to know that my questions are answered in a reasonable time with depth and actionable follow-up. I would also expect some proactive notice based on changing tax laws etc. I have yet to hear about financial professionals who provide actionable data to make decisions, beyond your basic AA. Time and time again, I hear about pros that don’t know what a backdoor Roth is, much less I-bonds or how to plan for Tax Loss Harvesting it holding international indexes in taxable to get the most of the tax refund. If you can do that, I would certainly pay you!

I read Rick ferri’s response and I think that would be a valuable model that matches some DIY and low cost with professional help. He seems stuck between being more expensive than DIY and too cheap when compared to JP Morgan or other advisors, but sounds just right for Millionaire Next Door types.
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Re: Hourly vs. retainer for a financial planner

Post by Rick Ferri »

There is always room for high fee advisers who cater to the name-dropping silver tea set crowd, but you won't find many here. :wink:

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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

FoolStreet wrote: Sat Apr 06, 2019 1:05 pm
I tend to think a fairly priced subscription would be reasonable. I would want to know that my questions are answered in a reasonable time with depth and actionable follow-up. I would also expect some proactive notice based on changing tax laws etc. I have yet to hear about financial professionals who provide actionable data to make decisions, beyond your basic AA. Time and time again, I hear about pros that don’t know what a backdoor Roth is, much less I-bonds or how to plan for Tax Loss Harvesting it holding international indexes in taxable to get the most of the tax refund. If you can do that, I would certainly pay you!
This is exactly what I'm trying to offer people. Here is an example. (This is a very common setup in estate tax avoidance.)

A typical "estate tax plan" used to involve transferring all the assets up to the amount of the estate tax exemption to a bypass trust (with the children as beneficiaries), and giving the widow(er) the remainder outright. This worked well to avoid estate tax on the amount of the exemption.

For example, John and Jane are collectively worth $5m. The estate tax exemption is $1m. John dies, and immediately transfers $1m to a bypass trust. The remaining $4m goes to his wife tax-free. The next day, Jane dies. She has a $1m exemption and $3m subject to estate tax. At a flat 40% rate, she owes $1.2m in estate tax.

Had they NOT funded the bypass trust when John died, she would have owed $1.6m in estate tax. (She would have $5m in assets. $1m is exempt, the other $4m is taxable.)

However--things are a little different now. 1.) We have portability, and 2.) The estate tax exemption is now $23m for a married couple. In this light, we need nothing more than an outright transfer. Now we can
- get a step-up in basis on the $1m that we WON'T put in the bypass trust,
- forego the administrative fees of setting up, funding, and filing a tax return for the trust, and
- keep the assets in Jane's control, rather than the trustee.

But John and Jane didn't want to pay the retainer. They didn't want me to be proactive. So now the entire amount of the estate ($5m) goes to the bypass trust. Now we have to pay the lawyer to set it up. We have to re-title the assets. We have to file the tax return. Jane no longer has access to this money--the trustee controls it. And Jane is no longer the beneficiary--the kids are. So we have to hope that Jane gets along with her kids, because they have absolutely no obligation to give her anything--not even $1. Hope she likes living in the projects and eating cat food.

And if they do decide to give her any money, it comes out of their estate tax exclusion and a 709 has to be filed.

What a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

Oh--and that's just the beginning. That doesn't include the yearly estimates we do for people in November to see if they can convert their IRA. And in West Texas, there's a lot of variation in income. I have seen a person make $1m one year and have a $400k loss the next, then go right back to $1m in income.

How much is a financial planner worth? Well, $400k at 37%, which is about $150,000 for a well-executed Roth Conversion.

But, as noted before, I'm really just an AUM-collecting scam artist who's not worth talking to. (Other than the half-million that I could have saved this not-entirely-hypothetical client who refused my services.)
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

And last year, I noticed a client (in his mid-70's) who had taken a $15k IRA distribution, then turned around and given a similar amount to the charity. I also noticed they had taken the standard deduction on their tax return. (Funny--I am the assistant treasurer of that charity AND I do this client's tax return.)

I told the client that they should talk to their broker at Merrill Lynch and have that amount sent directly to the charity. Since they are in the 24% tax bracket, that would save them $3600 per year.

I did that person's tax return this year. Guess who didn't take my advice? (And that advice was free!) They would rather pay the IRS $3,600 than pay my fee.

And they think that Merrill Lynch is doing them a great service. They are not going to read Jack Bogle's book. They are not going to browse Bogleheads.com. They do not know (nor do they care) who or what Vanguard is.

These people are paying a 1% fee to somebody. Might as well be me.
Last edited by Greenman72 on Sat Apr 06, 2019 2:21 pm, edited 1 time in total.
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

Last year, I saw a client who has a "financial advisor" at Edward Jones. He is in an American Funds allocation model. Last year, he got ~$60k in capital gains distributions from his mutual funds. That generated $12,000 in tax.

I advised him to switch to ETF's. (With me, of course.) Same allocation, same risk, same return, but that would save him $12,000.

Just did his return. Guess who got $71,000 in capital gains distributions this year? Guess who paid $14,000 in taxes unnecessarily??? (I can't do much about dividends. And some capital gains are unavoidable. But paying tax capital gains distributions are dumb. As is holding REIT's in a taxable account. Add another $2k to the "unnecessary tax" list.)

Not shabby savings for money-grubbing AUM hog. But remember--there are some people who refuse to talk to me. (BTW--these are real clients. Not hypotheticals. These are real conversation I had with people last year who DIDN'T take my advice.)
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dodecahedron
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Re: Hourly vs. retainer for a financial planner

Post by dodecahedron »

Greenman72 wrote: Sat Apr 06, 2019 1:27 pm
FoolStreet wrote: Sat Apr 06, 2019 1:05 pm
I tend to think a fairly priced subscription would be reasonable. I would want to know that my questions are answered in a reasonable time with depth and actionable follow-up. I would also expect some proactive notice based on changing tax laws etc. I have yet to hear about financial professionals who provide actionable data to make decisions, beyond your basic AA. Time and time again, I hear about pros that don’t know what a backdoor Roth is, much less I-bonds or how to plan for Tax Loss Harvesting it holding international indexes in taxable to get the most of the tax refund. If you can do that, I would certainly pay you!
This is exactly what I'm trying to offer people. Here is an example. (This is a very common setup in estate tax avoidance.)

A typical "estate tax plan" used to involve transferring all the assets up to the amount of the estate tax exemption to a bypass trust (with the children as beneficiaries), and giving the widow(er) the remainder outright. This worked well to avoid estate tax on the amount of the exemption.

For example, John and Jane are collectively worth $5m. The estate tax exemption is $1m. John dies, and immediately transfers $1m to a bypass trust. The remaining $4m goes to his wife tax-free. The next day, Jane dies. She has a $1m exemption and $3m subject to estate tax. At a flat 40% rate, she owes $1.2m in estate tax.

Had they NOT funded the bypass trust when John died, she would have owed $1.6m in estate tax. (She would have $5m in assets. $1m is exempt, the other $4m is taxable.)

However--things are a little different now. 1.) We have portability, and 2.) The estate tax exemption is now $23m for a married couple. In this light, we need nothing more than an outright transfer. Now we can
- get a step-up in basis on the $1m that we WON'T put in the bypass trust,
- forego the administrative fees of setting up, funding, and filing a tax return for the trust, and
- keep the assets in Jane's control, rather than the trustee.

But John and Jane didn't want to pay the retainer. They didn't want me to be proactive. So now the entire amount of the estate ($5m) goes to the bypass trust. Now we have to pay the lawyer to set it up. We have to re-title the assets. We have to file the tax return. Jane no longer has access to this money--the trustee controls it. And Jane is no longer the beneficiary--the kids are. So we have to hope that Jane gets along with her kids, because they have absolutely no obligation to give her anything--not even $1. Hope she likes living in the projects and eating cat food.

And if they do decide to give her any money, it comes out of their estate tax exclusion and a 709 has to be filed.

What a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
You could have headed off this particular problem by writing the original will as ¨all to Jane¨ but designate a bypass trust as secondary contingent beneficiary. That would have given Jane the option to disclaim whatever part of the estate she did not want and allow it to go to the bypass trust. This is what our attorney advised us to do back in the day. That way we did not need to modify our wills when estate tax laws later changed because the surviving spouse could disclaim whatever seemed most fitting at the time in the light of her needs, spending plans, and the tax laws at the time of death of the first spouse. (Of course Jane is probably in the hospital in a coma since your scenario has her dying the next day, but no plan can deal with every contingency.)

More broadly, I do eventually see the need for periodic reviews once I am no longer competent to handle my own affairs but my personal goal is for a very simple and robust turnkey plan in keeping with my values. (Given my charitable giving plans, both lifetime and bequest, I am not concerned about estate taxes.) A modest annual retainer is not unreasonable.
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dodecahedron
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Re: Hourly vs. retainer for a financial planner

Post by dodecahedron »

Greenman72 wrote: Sat Apr 06, 2019 1:55 pm
Not shabby savings for money-grubbing AUM hog. But remember--there are some people who refuse to talk to me. (BTW--these are real clients. Not hypotheticals. These are real conversation I had with people last year who DIDN'T take my advice.)
So they did not take your advice even when you offered it as a (presumably free) bonus in conjunction with their tax return prep.

How do you convince folks like that that you have advice worth paying for?
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

^Good question. Maybe if I had charged them upfront, they would have taken my advice.

Maybe, I should have told them that I would give them a guarantee that they would reduce their taxes, but I want 25% of it up front. Write me a $900 check and I'll tell you what to do (for the charitable IRA contribution) or $4,000 (for capital gains distributions).
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Re: Hourly vs. retainer for a financial planner

Post by Slick8503 »

The all to familiar problem of “if you know enough to pick a good advisor, you probably don’t need an advisor.”
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Re: Hourly vs. retainer for a financial planner

Post by Lafder »

I would rather pay hourly, with an estimate up front of how many hours it might take. :)

Best of luck with your business venture.

lafder
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Ron Swanson
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Re: Hourly vs. retainer for a financial planner

Post by Ron Swanson »

I think what Rick described above makes the most sense, but if I', a potential customer, I think a straight hourly fee is easier to digest emtionally. Paying an hourly fee makes me feel like I am getting something for each hour's work. Paying a retainer up front makes me feel like I have to pay a cover charge just a get in the door (and I certainly don't go to bars that charge a cover).

As a side note, I'm surprised at the initial reaction to this thread. Not many people go out of their way to learn about, and manage their own investments. My wife thinks I'm a crazy person for reading a financial advice forum for fun. If I died suddenly, she would certainly need to seek professional advice.
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Re: Hourly vs. retainer for a financial planner

Post by Tdubs »

Greenman72 wrote: Sat Apr 06, 2019 1:27 pm
FoolStreet wrote: Sat Apr 06, 2019 1:05 pm
I tend to think a fairly priced subscription would be reasonable. I would want to know that my questions are answered in a reasonable time with depth and actionable follow-up. I would also expect some proactive notice based on changing tax laws etc. I have yet to hear about financial professionals who provide actionable data to make decisions, beyond your basic AA. Time and time again, I hear about pros that don’t know what a backdoor Roth is, much less I-bonds or how to plan for Tax Loss Harvesting it holding international indexes in taxable to get the most of the tax refund. If you can do that, I would certainly pay you!
This is exactly what I'm trying to offer people. Here is an example. (This is a very common setup in estate tax avoidance.)

A typical "estate tax plan" used to involve transferring all the assets up to the amount of the estate tax exemption to a bypass trust (with the children as beneficiaries), and giving the widow(er) the remainder outright. This worked well to avoid estate tax on the amount of the exemption.

For example, John and Jane are collectively worth $5m. The estate tax exemption is $1m. John dies, and immediately transfers $1m to a bypass trust. The remaining $4m goes to his wife tax-free. The next day, Jane dies. She has a $1m exemption and $3m subject to estate tax. At a flat 40% rate, she owes $1.2m in estate tax.

Had they NOT funded the bypass trust when John died, she would have owed $1.6m in estate tax. (She would have $5m in assets. $1m is exempt, the other $4m is taxable.)

However--things are a little different now. 1.) We have portability, and 2.) The estate tax exemption is now $23m for a married couple. In this light, we need nothing more than an outright transfer. Now we can
- get a step-up in basis on the $1m that we WON'T put in the bypass trust,
- forego the administrative fees of setting up, funding, and filing a tax return for the trust, and
- keep the assets in Jane's control, rather than the trustee.

But John and Jane didn't want to pay the retainer. They didn't want me to be proactive. So now the entire amount of the estate ($5m) goes to the bypass trust. Now we have to pay the lawyer to set it up. We have to re-title the assets. We have to file the tax return. Jane no longer has access to this money--the trustee controls it. And Jane is no longer the beneficiary--the kids are. So we have to hope that Jane gets along with her kids, because they have absolutely no obligation to give her anything--not even $1. Hope she likes living in the projects and eating cat food.

And if they do decide to give her any money, it comes out of their estate tax exclusion and a 709 has to be filed.

What a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
Of course, John and Jane could come to BH and read this for free.
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Re: Hourly vs. retainer for a financial planner

Post by livesoft »

Greenman72 wrote: Sat Apr 06, 2019 1:27 pmWhat a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
So why wasn't the first estate plan set up with a term about using the current legal estate tax exemption at the time of death? Then the plan would not be locked into the original $5M. And also the original plan could have been written such that the bypass trust(s) would not even need to be funded if there were no funds for them given that the estate tax exemption had gone up to more than estate value anyways.

But I agree with Greenman72 and Forrest Gump: Stupid is as stupid does.
Last edited by livesoft on Sat Apr 06, 2019 3:31 pm, edited 1 time in total.
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Tdubs
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Re: Hourly vs. retainer for a financial planner

Post by Tdubs »

Ron Swanson wrote: Sat Apr 06, 2019 3:00 pm I think what Rick described above makes the most sense, but if I', a potential customer, I think a straight hourly fee is easier to digest emtionally. Paying an hourly fee makes me feel like I am getting something for each hour's work. Paying a retainer up front makes me feel like I have to pay a cover charge just a get in the door (and I certainly don't go to bars that charge a cover).

As a side note, I'm surprised at the initial reaction to this thread. Not many people go out of their way to learn about, and manage their own investments. My wife thinks I'm a crazy person for reading a financial advice forum for fun. If I died suddenly, she would certainly need to seek professional advice.
I've left my wife an "if I die" note. One of the first instructions to her is to pay the 0.3% fee for a Vanguard advisor and request a three fund portfolio.
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Re: Hourly vs. retainer for a financial planner

Post by livesoft »

Tdubs wrote: Sat Apr 06, 2019 3:29 pmI've left my wife an "if I die" note. One of the first instructions to her is to pay the 0.3% fee for a Vanguard advisor and request a three fund portfolio.
That doesn't mean she will do that. I have a friend whose husband passed away. They had a decent advisor, but she was pulled every which way by the people at her church, the people at her bank, and her family. They all sowed doubts about the advisor. And the life insurance went into the bank account and most of it has not left the bank. The inherited 401(k) went someplace else.

If it means anything, I am sure the advisor was the best place for all her money which I told her when she asked me and showed me all her financial statements in the presence of her elderly father. Nevertheless, she didn't put all her money with her excellent advisor that she has known for years and years.

So perhaps the only way you can guarantee that your spouse will go to Vanguard is to have her go NOW. Put some money there with VPAS so that she has that all taken care of NOW. Adding more money later should be less of a problem (despite what I wrote about my friend).
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Re: Hourly vs. retainer for a financial planner

Post by Tdubs »

livesoft wrote: Sat Apr 06, 2019 3:36 pm
Tdubs wrote: Sat Apr 06, 2019 3:29 pmI've left my wife an "if I die" note. One of the first instructions to her is to pay the 0.3% fee for a Vanguard advisor and request a three fund portfolio.
That doesn't mean she will do that. I have a friend whose husband passed away. They had a decent advisor, but she was pulled every which way by the people at her church, the people at her bank, and her family. They all sowed doubts about the advisor. And the life insurance went into the bank account and most of it has not left the bank. The inherited 401(k) went someplace else.

If it means anything, I am sure the advisor was the best place for all her money which I told her when she asked me and showed me all her financial statements in the presence of her elderly father. Nevertheless, she didn't put all her money with with her excellent advisor that she had known for years and years.

So perhaps the only way you can guarantee that your spouse will go to Vanguard is to have her go NOW. Put some money there with VPAS so that she has that all taken care of NOW. Adding more money should be less of a problem (despite what I wrote about my friend).
Worth considering. I can think of one relative who might push a very expensive FA on her.
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

Tdubs wrote: Sat Apr 06, 2019 3:24 pm Of course, John and Jane could come to BH and read this for free.
I love it when people say this.

If they won't listen to me when I say, "Switch to ETF's and save $15,000 per year", then they certainly won't come and browse an internet forum full of concepts that they will never understand. I literally wrote down what one guy needed to do to save $15,000 and he changed absolutely nothing. And you think they're going to read "John Bogle on Mutual Funds"? Give me a break.
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Re: Hourly vs. retainer for a financial planner

Post by Rick Ferri »

Tdubs wrote: Sat Apr 06, 2019 3:29 pmI've left my wife an "if I die" note. One of the first instructions to her is to pay the 0.3% fee for a Vanguard advisor and request a three fund portfolio.
I've been in the business for 30 years and have been told dozens of times that I'm that person for a spouse to contact in the "if I die" note. It has never happened. Not once.

I'd like to think that no one ever dies who named me as their guy, but let's be realistic. What actually happens is the widow(er) gets hit-up by their CPA or attorney or insurance agent or some long-lost nephew who is now in the brokerage business and the money goes to high fee products and services.

Moral of the story: If you want to have your heirs do business with a particular adviser or a firm, establish the relationship when you're alive and get them involved. If you don't, it isn't going to happen when you're dead.

Rick Ferri
Last edited by Rick Ferri on Sat Apr 06, 2019 4:13 pm, edited 1 time in total.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

livesoft wrote: Sat Apr 06, 2019 3:28 pm
Greenman72 wrote: Sat Apr 06, 2019 1:27 pmWhat a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
So why wasn't the first estate plan set up with a term about using the current legal estate tax exemption at the time of death? Then the plan would not be locked into the original $5M. And also the original plan could have been written such that the bypass trust(s) would not even need to be funded if there were no funds for them given that the estate tax exemption had gone up to more than estate value anyways.
That's exactly how it was set up.
The bypass trust (managed by an independent trustee for the kid's benefit) is funded up to the maximum estate tax exemption at the time of death. It used to be $600,000 (and the not-entirely-hypothetical client had a $5m estate). And made perfect sense when the exemption was $600,000.

Now the exemption is $23m and the client has an $5m estate. Therefore, when the client (who hasn't updated his will in 20 years) dies, all of the client's money goes to the bypass trust, and the widow has absolutely no claim to it whatsoever.

This is not what the client intended. And it creates a massive headache, at best. At worst, it leaves the widow financially destitute. She may even be homeless, depending on how the house is titled. But that's what's in the will. That's how it was drawn up. She has no legal grounds to any of the estate property.
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Re: Hourly vs. retainer for a financial planner

Post by dodecahedron »

Greenman72 wrote: Sat Apr 06, 2019 4:13 pm
livesoft wrote: Sat Apr 06, 2019 3:28 pm
Greenman72 wrote: Sat Apr 06, 2019 1:27 pmWhat a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
So why wasn't the first estate plan set up with a term about using the current legal estate tax exemption at the time of death? Then the plan would not be locked into the original $5M. And also the original plan could have been written such that the bypass trust(s) would not even need to be funded if there were no funds for them given that the estate tax exemption had gone up to more than estate value anyways.
That's exactly how it was set up.
The bypass trust (managed by an independent trustee for the kid's benefit) is funded up to the maximum estate tax exemption at the time of death. It used to be $600,000 (and the not-entirely-hypothetical client had a $5m estate). And made perfect sense when the exemption was $600,000.

Now the exemption is $23m and the client has an $5m estate. Therefore, when the client (who hasn't updated his will in 20 years) dies, all of the client's money goes to the bypass trust, and the widow has absolutely no claim to it whatsoever.

This is not what the client intended. And it creates a massive headache, at best. At worst, it leaves the widow financially destitute. She may even be homeless, depending on how the house is titled. But that's what's in the will. That's how it was drawn up. She has no legal grounds to any of the estate property.
As I pointed out above, it was drawn up wrong to begin with. It should have been written to give the surviving spouse the option but not the obligation to do a partial disclaimer of a portion of her inheritance to a contingent bypass trust secondary beneficiary. Estate tax provisions are constantly changing, not only at the federal level but also at the state level, plus moves to new states are possible, there may be many things unknown at the time the will is written. No reason to write a will that gives the surviving spouse so little flexibility.

Moreover, since you are not an attorney, I would suggest referring your client to a lawyer when the will needs amending for any reason, not just telling your clients to ¨tear up¨ the old will and handwriting a new will specifying ¨All to wife.¨ If the old will was written properly, it may not need amending.
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Re: Hourly vs. retainer for a financial planner

Post by tibbitts »

Greenman72 wrote: Sat Apr 06, 2019 12:48 pm
GCD wrote: Sat Apr 06, 2019 12:38 pm I think you have a profitable and functional business model. Lots of people buy it. You will probably do very well financially. You just won't have BH for a large percentage of your client base.
No doubt. I'm not coming here to advertise. I'm coming here because I value the opinions of some of the people here. Rick Ferri is one of them. (Thanks for sharing, Rick.)

Some of the others include nisiprius, Financialdave, Random Walker, and Spirit Rider (just to name a few).
I don't think you get to select who supplies opinions.

On another subject, don't some of those services you listed require you to be an attorney?
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Re: Hourly vs. retainer for a financial planner

Post by LadyGeek »

I removed several off-topic posts and replies, the discussion was getting contentious. As a reminder, see: General Etiquette
This is a moderated forum. We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones.

Discussions are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them.

At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
Please state your concerns in a civil, factual, manner.
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Re: Hourly vs. retainer for a financial planner

Post by GCD »

Rick Ferri wrote: Sat Apr 06, 2019 4:10 pm I've been in the business for 30 years and have been told dozens of times that I'm that person for a spouse to contact in the "if I die" note. It has never happened. Not once.

I'd like to think that no one ever dies who named me as their guy, but let's be realistic. What actually happens is the widow(er) gets hit-up by their CPA or attorney or insurance agent or some long-lost nephew who is now in the brokerage business and the money goes to high fee products and services.

Moral of the story: If you want to have your heirs do business with a particular adviser or a firm, establish the relationship when you're alive and get them involved. If you don't, it isn't going to happen when you're dead.

Rick Ferri
Interesting observation. Just like in another ongoing thread about behavioral finance, there is a difference in how things go when real people are involved and it's no longer theory or a hypothetical.
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Re: Hourly vs. retainer for a financial planner

Post by bsteiner »

Greenman72 wrote: Sat Apr 06, 2019 1:27 pm
FoolStreet wrote: Sat Apr 06, 2019 1:05 pm
I tend to think a fairly priced subscription would be reasonable. I would want to know that my questions are answered in a reasonable time with depth and actionable follow-up. I would also expect some proactive notice based on changing tax laws etc. I have yet to hear about financial professionals who provide actionable data to make decisions, beyond your basic AA. Time and time again, I hear about pros that don’t know what a backdoor Roth is, much less I-bonds or how to plan for Tax Loss Harvesting it holding international indexes in taxable to get the most of the tax refund. If you can do that, I would certainly pay you!
This is exactly what I'm trying to offer people. Here is an example. (This is a very common setup in estate tax avoidance.)

A typical "estate tax plan" used to involve transferring all the assets up to the amount of the estate tax exemption to a bypass trust (with the children as beneficiaries), and giving the widow(er) the remainder outright. This worked well to avoid estate tax on the amount of the exemption.

For example, John and Jane are collectively worth $5m. The estate tax exemption is $1m. John dies, and immediately transfers $1m to a bypass trust. The remaining $4m goes to his wife tax-free. The next day, Jane dies. She has a $1m exemption and $3m subject to estate tax. At a flat 40% rate, she owes $1.2m in estate tax.

Had they NOT funded the bypass trust when John died, she would have owed $1.6m in estate tax. (She would have $5m in assets. $1m is exempt, the other $4m is taxable.)

However--things are a little different now. 1.) We have portability, and 2.) The estate tax exemption is now $23m for a married couple. In this light, we need nothing more than an outright transfer. Now we can
- get a step-up in basis on the $1m that we WON'T put in the bypass trust,
- forego the administrative fees of setting up, funding, and filing a tax return for the trust, and
- keep the assets in Jane's control, rather than the trustee.

But John and Jane didn't want to pay the retainer. They didn't want me to be proactive. So now the entire amount of the estate ($5m) goes to the bypass trust. Now we have to pay the lawyer to set it up. We have to re-title the assets. We have to file the tax return. Jane no longer has access to this money--the trustee controls it. And Jane is no longer the beneficiary--the kids are. So we have to hope that Jane gets along with her kids, because they have absolutely no obligation to give her anything--not even $1. Hope she likes living in the projects and eating cat food.

And if they do decide to give her any money, it comes out of their estate tax exclusion and a 709 has to be filed.

What a mess. All because they didn't want to pay for somebody to check their estate plan every year and say, "Yep--we can tear up this will and get a new one that says 'all to wife'." (because that's all you'd have to do to have a legally binding will in the state of Texas.)
If it's a first marriage, Jane will usually be a beneficiary of the credit shelter trust, so the trustees will be able to make distributions to Jane, or direct that the trust not be set up and that the executor distribute the assets to Jane. If there was an error in the planning, it was not including Jane as a beneficiary of the credit shelter trust.

If Jane isn't the mother of the children, the plan should have been reviewed when the estate tax exclusion amount increased so dramatically. (If it was $1 million when the Will was signed, then the Will was signed in 2002 or 2003, and at that time it was scheduled to increase to $3.5 million in 2009, there was to be no estate tax in 2010, and it was scheduled to revert to $1 million in 2011, so a formula geared to the exclusion amount with the spouse not being a beneficiary of the credit shelter trust probably didn't make sense even when the Will was signed.

There isn't much work to set up the credit shelter trust. The executors have to distribute the assets to someone. If the trustees invest in a small number of mutual funds, the annual income tax return for the trust won't be difficult.

With the current level of the estate tax exclusion amount (though it's scheduled to revert to pre-2018 law in 2026) and portability for estate tax purposes but not for GST tax purposes, planning for medium size estates is more complicated than it was when the exclusion amount was $1 million. A couple with combined assets of $5 million might still mandate a credit shelter trust, or might leave all to each other with a disclaimer trust as backup, or leave their estates to a marital-type trust. There are other possible choices as well.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

Two things:

1. I am not an attorney. I do not devise such things. The attorneys do that—I just interpret it for the client and help them decide if it still makes sense. This wasn’t intended to be an estate planning thread. It was just an example of how a “real” financial planner might add value.

2. I’d prefer if we’d just keep to the subject—retainer or hourly? (I got in my soap box for a minute too.)
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Re: Hourly vs. retainer for a financial planner

Post by bsteiner »

Greenman72 wrote: Sat Apr 06, 2019 8:56 pm Two things:

1. I am not an attorney. I do not devise such things. The attorneys do that—I just interpret it for the client and help them decide if it still makes sense. This wasn’t intended to be an estate planning thread. It was just an example of how a “real” financial planner might add value.

2. I’d prefer if we’d just keep to the subject—retainer or hourly? (I got in my soap box for a minute too.)
Hourly like lawyers and accountants generally work. The client may need more of your time one year and less or none another year.
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Re: Hourly vs. retainer for a financial planner

Post by dodecahedron »

Greenman72 wrote: Sat Apr 06, 2019 8:56 pm Two things:

1. I am not an attorney. I do not devise such things. The attorneys do that—I just interpret it for the client and help them decide if it still makes sense. This wasn’t intended to be an estate planning thread. It was just an example of how a “real” financial planner might add value.

2. I’d prefer if we’d just keep to the subject—retainer or hourly? (I got in my soap box for a minute too.)
How about both?

You are offering quite an eclectic laundry list of services. Any given client will generally only need a subset of them. Some of the services may be quite time consuming (e.g., buy-sell agreement for a small business).

So annual meeting for core services and hourly for specialized extras. That said, I think you need to be doing some serious time investment in your human capital before you even begin to market services in areas where you acknowledge you are not fully versed, e.g., elder planning.
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Re: Hourly vs. retainer for a financial planner

Post by Tdubs »

Greenman72 wrote: Sat Apr 06, 2019 4:03 pm
Tdubs wrote: Sat Apr 06, 2019 3:24 pm Of course, John and Jane could come to BH and read this for free.
I love it when people say this.

If they won't listen to me when I say, "Switch to ETF's and save $15,000 per year", then they certainly won't come and browse an internet forum full of concepts that they will never understand. I literally wrote down what one guy needed to do to save $15,000 and he changed absolutely nothing. And you think they're going to read "John Bogle on Mutual Funds"? Give me a break.
Yes, I've seen your previous comments on this subject. Your client displayed a very common bias toward valuing most what he already owned. And, given the investor drift toward owning the very kind of inexpensive funds you failed to sell him, he is an unrepresentative anecdote. They might not be reading John Bogle, but they hear his word and are giving a smaller share of their money to advisors who don't preach the Gospel of Jack.
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