Hourly vs. retainer for a financial planner

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BroIceCream
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Re: Hourly vs. retainer for a financial planner

Post by BroIceCream »

Greenman72 wrote: Sat Apr 06, 2019 12:20 pm ^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.)
I've used Zoril, and found his service quite helpful. eMoney is ok, but I use other tools for retirement planning and analysis. I most value his service for the on-demand Q&A & personal interaction. Several times he has provided great advice on retirement planning, strategies between different types of securities, and asset allocation. He is an registered adviser I trust to prevent me from doing anything stupid.

Previously I've had other "hourly" advisers turn me down, when I only wanted a sanity-check/calibration session. Said it wasn't worth their time and didn't want to "divulge their strategies" to a non-client. They only wanted to talk if they had my "assets under management". (those advisors were identified from the DFA advisor directory and also from Garrett Planning Network).
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

BroIceCream wrote: Sun Apr 07, 2019 1:09 am
Previously I've had other "hourly" advisers turn me down, when I only wanted a sanity-check/calibration session. Said it wasn't worth their time and didn't want to "divulge their strategies" to a non-client. They only wanted to talk if they had my "assets under management".
To be honest, I can't say that I blame them. Like the Joker said, "If you're good at something, never do it for free."

I pride myself on having a philosophy of low costs, low turnover, and high tax efficiency. Therefore, I believe I have the best investment performance, after all costs are considered. If I tell my clients (or my non-clients) what's in the secret sauce, then they'll have no incentive to pay me. (I'm starting to realize that I'm making that mistake, and that I shouldn't give away my knowledge, which is my most powerful asset.)

It's probably not worth their time, because they can either spend four hours working on your problem, and the most they'll realize is $600. Or they can spend four hours prospecting, get a millionaire client, and make $10k per year in fees off that client. I'd probably do the same thing.
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BroIceCream
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Re: Hourly vs. retainer for a financial planner

Post by BroIceCream »

Greenman72 wrote: Sun Apr 07, 2019 2:08 pm It's probably not worth their time, because they can either spend four hours working on your problem, and the most they'll realize is $600. Or they can spend four hours prospecting, get a millionaire client, and make $10k per year in fees off that client. I'd probably do the same thing.
[ quote fixed by admin LadyGeek]

The danger is that some might be willing to pay hourly to get to know the adviser and see if there is a compatible relationship. Closing the door too early on a millionaire investigator is a loss for both.
Mr.BB
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Re: Hourly vs. retainer for a financial planner

Post by Mr.BB »

I think you will find that most people will just need an hourly rate. If you do manage to catch that big fish, then having the option to give them an annual fee probably would work better for them.
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MikeG62
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Re: Hourly vs. retainer for a financial planner

Post by MikeG62 »

OP, If I were inclined to use your services, I would price out the cost of the time required by you for the services I’d need and compare that to the retainer. My gut tells me that would result in the smaller fee (in part because I don’t think I’d need all of the services imbedded in your retainer agreement). So I would go hourly at least at first.

I am in the camp of people whose wife will be lost with regard to managing our finances should I predecease her. So this could lead me to switch over to the retainer model at some point as she would likely be unable to choose in an a la carte fashion from your services. Better to have someone like you deciding what she needs to have looked at and then keep her up to speed.

Having said this, if I thought my wife would pay you (or anyone) a 1.0% AUM fee, I’d have a hard time engaging you from the onset. Because of your fee, I’d advise my wife to go with the Vanguard PAS offering instead. If your fee were closer to their fee - even up to 40-50bps - I would be much more comfortable moving forward with someone like you. So the 1.0% AUM fee would be a deal killer for me in engaging you in the first place if I thought there was any chance we/she would use your asset management services in the future.
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Tdubs
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Re: Hourly vs. retainer for a financial planner

Post by Tdubs »

Greenman72 wrote: Sun Apr 07, 2019 2:08 pm I pride myself on having a philosophy of low costs, low turnover, and high tax efficiency. Therefore, I believe I have the best investment performance, after all costs are considered. If I tell my clients (or my non-clients) what's in the secret sauce, then they'll have no incentive to pay me. (I'm starting to realize that I'm making that mistake, and that I shouldn't give away my knowledge, which is my most powerful asset.)
Your go-to funds are American Funds, right? Low cost? Low turnover? Not compared to . . . .

There is no secret sauce. It is all out there if people will look. As you noted, you have clients because they don't want to look for themselves. Your advantage is service, not some proprietary information.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

^I Use American Funds for my A-share business, which is relatively small. Accounts less than $100k and 529’s is about it. Other than that, I use either Vanguard’s or Morningstar’s TAMP.

And you’re right. There is no secret in the sauce. All of this information is freely available online and in many well-known books. But if it’s so easy, why aren’t all the clients doing it? And why should I tell them about it, so they can implement my ideas elsewhere.
johnnyc321
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Re: Hourly vs. retainer for a financial planner

Post by johnnyc321 »

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.
Regarding estate planning and some of the other things you mentioned, are you drafting documents for clients? Because that would be practicing law and in most states, a crime if you are not admitted to the state bar.
afan
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Re: Hourly vs. retainer for a financial planner

Post by afan »

I think bsteiner has said that you have to be a lawyer, but you do not have to be admitted to the bar for each state for which you do estate planning. I don't know the details.

I agree that I would only consult an attorney who is an expert in estates and trusts for this work. I don't believe someone who is not an attorney at all would have a role

When I need estate planning help I consult an expert attorney. I do not pay a retainer, since I can go for years without needing their services.

Similarly, if I were to need advice from a tax expert, I would consult an enrolled agent or CPA who specializes in individual taxes when the need arose. I would not pay them year in and year out on the off chance that something might come up.

So hourly rate or per project would be the only options I would consider. Annual or quarterly fee or retainer is out of the question. Same for paying someone 1% of assets to manage my investments.

If I wanted advice about insurance, I would seek it from someone who does not sell insurance at all. Buying insurance through the advisor would be insane. Even telling the advisor that I wanted advice but absolutely not buy insurance from them would leave a conflict of interest too large to contemplate.

If I did need portfolio management, I would look for a flat fee deal. Perhaps this new Schwab product. Vanguard's 0.3% is the outer limit of what I would consider. Too expensive but at least I would like the portfolio.

I would never consider letting someone charge me anything to put my investments in active funds, let alone those with loads.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
afan
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Re: Hourly vs. retainer for a financial planner

Post by afan »

I suppose my biggest concern about using an advisor as the OP suggests is that I would not believe any one person was expert in all of these areas. I would assume that someone who tried to be a jack of all trades would not be particularly useful in any of them.

I would not go to the estate planning attorney for advice about portfolio management.
I would not go to the tax expert for advice about insurance products.
You get the idea.

If a CPA focuses on individual and small business taxes, then I could believe that person could be helpful if I had a tax question.
But if that person claims to be expert on all subjects related to financial planning and investments, well I simply would not believe them. I would not even want them doing my taxes. Does this person also do dentistry and civil litigation on the side?
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
dknightd
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Re: Hourly vs. retainer for a financial planner

Post by dknightd »

I guess the first question is how do you charge for your time now? Do you have a flat (annual) fee to do their taxes, or, do you charge hourly?
I think if I wanted to get into the business you are suggesting I'd start with an hourly fee. Once they are convinced you add value, and they are willing to let you manage their money, I'd consider the 1% annual fee as a retainer. Once they let you manage their money I'd give them free advice as long as they kept paying the 1% of Assets Under Management (AUM). If you can get a couple dozen rich people to pay you 1% of their assets, every year, you can buy a Porsche ;)
If you value a bird in the hand, pay off the loan. If you are willing to risk getting two birds (or none) from the market, invest the funds. Retired 9/19. Still working on mortgage payoff.
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Greenman72
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Re: Hourly vs. retainer for a financial planner

Post by Greenman72 »

afan wrote: Mon Apr 08, 2019 10:07 am I suppose my biggest concern about using an advisor as the OP suggests is that I would not believe any one person was expert in all of these areas. I would assume that someone who tried to be a jack of all trades would not be particularly useful in any of them.

I would not go to the estate planning attorney for advice about portfolio management.
I would not go to the tax expert for advice about insurance products.
You get the idea.

If a CPA focuses on individual and small business taxes, then I could believe that person could be helpful if I had a tax question.
But if that person claims to be expert on all subjects related to financial planning and investments, well I simply would not believe them. I would not even want them doing my taxes. Does this person also do dentistry and civil litigation on the side?
First, let me say that it seems strange for a person to say, "I would not trust a guy who was a CPA, CFA, CFP, and insurance agent on these matters. I would much rather go to Bogleheads.com and discuss these ideas with a bunch of anonymous strangers who may (or may not) have any education or expertise, and there is absolutely no way of verifying such credentials."

But nonetheless--just look at Bogleheads.com. What are the questions? They are 45% investing, 45% tax, and 10% estate planning. What makes you think that a CPA/CFA/CFP/Insurance agent is unable to answer these questions? (Sure, if it's outside of my area of competence, it gets referred to a SME. But to be honest, that's pretty rare.)
donaldfair71
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Re: Hourly vs. retainer for a financial planner

Post by donaldfair71 »

Greenman72 wrote: Sat Apr 06, 2019 12:20 pm ^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.)
It's a case of I get what I don't pay for. This stuff isn't rocket science, and he provides plenty enough guidance without the fleecing.
donaldfair71
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Re: Hourly vs. retainer for a financial planner

Post by donaldfair71 »

Greenman72 wrote: Sun Apr 07, 2019 7:42 pm And you’re right. There is no secret in the sauce. All of this information is freely available online and in many well-known books. But if it’s so easy, why aren’t all the clients doing it? And why should I tell them about it, so they can implement my ideas elsewhere.
But why should I pay more than $100/year for it? It doesn't take a portfolio all that big before the person charging even .5% of AUM, or charging me for front end loads, has to produce a lot of alpha to justify the cost. It's not what the adviser makes for me, it's what he makes for me that I also get to keep.

Having said all that, my "Hit by a bus" plan for my wife, should I be unable to manage finances, is to call Vanguard PAS and let them run the show. She has no interest in the finances, and that's okay. I don't even want her to deal with Mark. Thirty basis points is plenty cheap enough for her peace of mind, and i think they will help her in any/all things necessary.
afan
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Re: Hourly vs. retainer for a financial planner

Post by afan »

Greenman72 wrote: Tue Apr 09, 2019 9:12 am
afan wrote: Mon Apr 08, 2019 10:07 am I suppose my biggest concern about using an advisor as the OP suggests is that I would not believe any one person was expert in all of these areas. I would assume that someone who tried to be a jack of all trades would not be particularly useful in any of them.

I would not go to the estate planning attorney for advice about portfolio management.
I would not go to the tax expert for advice about insurance products.
You get the idea.

If a CPA focuses on individual and small business taxes, then I could believe that person could be helpful if I had a tax question.
But if that person claims to be expert on all subjects related to financial planning and investments, well I simply would not believe them. I would not even want them doing my taxes. Does this person also do dentistry and civil litigation on the side?
First, let me say that it seems strange for a person to say, "I would not trust a guy who was a CPA, CFA, CFP, and insurance agent on these matters. I would much rather go to Bogleheads.com and discuss these ideas with a bunch of anonymous strangers who may (or may not) have any education or expertise, and there is absolutely no way of verifying such credentials."

But nonetheless--just look at Bogleheads.com. What are the questions? They are 45% investing, 45% tax, and 10% estate planning. What makes you think that a CPA/CFA/CFP/Insurance agent is unable to answer these questions? (Sure, if it's outside of my area of competence, it gets referred to a SME. But to be honest, that's pretty rare.)
It has to do with what the person spends their days doing. The more different things the try to do, the less attention they can pay to any one of them. I would worry that the person would have acquired an entry level credential in a field, but then spent little time working in that area thereafter. So I would think that, rather than getting better with experience, the knowledge would become dated and much would be forgotten.

I would want my tax advisor, if I needed one, to be a full time tax expert. If they are a CPA, that would be fine. I would consider it critical that they worked full time on tax. They spent their continuing education on tax. They were constantly learning more about tax for their clients and that growing knowledge works to the advantage of the other clients. They cannot do this if most of their time is spent on other things.

I would want my estate planning attorney to practice this area of law full time. Continuing legal education on estates and trusts. Writing and teaching in this field. Not being distracted by trying to run portfolios or analyze insurance companies.

If I needed a portfolio manager, I would expect that person had very strong education in that area, likely a doctorate in economics or financial engineering. Followed by working full time in investment management. If instead after their degree they supported themselves doing taxes and selling insurance, I would lose any interest in what they had to say about investing. I would view them as someone who had the background to go into investment management but decided to do something else.

As I indicated, I would never seek advice on insurance from someone who stood to profit by selling me insurance. I might be interested in the opinion of an actuary, who spent their professional life consulting on insurance, but did not sell it.

If they also did taxes, managed portfolios and practiced dentistry I would lose interest in having them do any of the above for me.

If someone got credentials in all these areas I would view them as a dilettante who MIGHT have been on the way to being fine in one area but got distracted. Someone who is part time in each of these areas I would avoid like the plague.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
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