What’s Your Fee Schedule?
Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.
Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.
Let’s meet the panel.
Andy AUM. Andy charges an asset under management fee of 1%.
Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.
Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.
Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.
Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.
Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.
Nate:
Andy tell me about your assets under management model.
Andy:
Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.
Nate:
Thank you. As the accounts grow in value, you’ll also make more money – correct?
Andy:
Yes, but so will my clients.
Nate:
What if the accounts drop in value like they did in 2018?
Andy:
The fee will go down if the accounts drop in value. My income will be lower as well.
Nate:
Hank, please tell me about your hourly model.
Hank:
Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.
Nate:
So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?
Hank:
Yes, that’s correct.
Nate:
At $500 an hour, your fee will run $4,000 to $5,000?
Hank:
Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.
Nate:
Thanks Hank. Rebecca, please tell me about your retainer model.
Rebecca:
Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.
Nate:
A car payment?
Rebecca:
Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.
Nate:
Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?
Rebecca:
That’s correct. It’s based on income.
Nate:
How long do your client’s pay a retainer fee? How long do they stay in this arrangement?
Rebecca:
Our clients stay with us for about three to five years before they move on.
Nate:
What if a client wants to invest based on your recommendations?
Rebecca:
We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.
Nate:
Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.
Cindy:
Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.
Nate:
So, the more you trade, the more you make?
Cindy:
Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.
Nate:
Of course. What’s the commission on a mutual fund trade?
Cindy:
The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.
Nate:
If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?
Cindy:
Yes, it’s a one-time charge.
Nate:
What about an annuity purchase?
Cindy:
The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.
Nate:
Give us an example please.
Cindy:
Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.
Nate:
10%? That seems outrageously high. Am I wrong?
Cindy:
It’s a high fee, but we encourage our clients to be long-term investors.
Nate:
What would your fee be if they purchased the ABC annuity?
Cindy:
It is 5%, or $5,000.
Nate:
Will the client incur any other fees?
Cindy:
Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.
Nate:
Thanks Cindy. Frank, tell us about your flat-fee model.
Frank:
Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.
Nate:
A client with $50,000 in assets will pay just as much as someone with $5 million in assets?
Frank:
That is true. However, we have an account minimum of $500,000.
Nate:
If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.
Frank:
Well, the fee is more than asset management fee. I also get paid for advice and financial planning.
Nate:
How do you manage the assets for your clients?
Frank:
We use mutual funds.
Nate:
Do the clients pay a fee to purchase the funds?
Frank:
They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.
Nate:
Thanks Frank.
Nate:
Let’s her from Patty. Patty tell us about your fee structure.
Patty:
Thank you, Nate. I only charge client for advice and financial planning.
Nate:
Interesting. What about managing assets?
Patty:
I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.
Nate:
Okay. If a client comes to you for financial planning and advice, what does it look like?
Patty:
The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity. Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.
Nate:
Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?
Andy:
I will. My fee would be $5,000 per year, or 1% of $500,000.
Rebecca:
My fee would be $6,000 per year, or $500 per month.
Hank:
For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.
Cindy:
Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.
Frank:
My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.
Patty:
This planning fee for this client, based on her assets, would be $5,000.
Nate:
Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?
Panel:
Yes.
Nate:
Also, regardless of the stock market’s performance, you’re all getting paid?
Panel:
Yes.
Nate:
Last question: Who’s model is best?
Panel:
(In unison): Mine.
Nate:
(laughing), Okay! Thank you all for your time today.
“A rose by any other name would smell as sweet.” ~ Romeo and Juliet
April 3, 2019
Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.
At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.
Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.