Justifying charging 1% fee

or Register to post new content in the forum

40 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Jul 20, 2009 9:36 pm

Question for all you fee only planners out there, In the last couple of years the wind has been blowing in favor of fee only planning vs commision as being morally superior,

So if you are an ADVISOR vs BROKER how do you justify charging 1% or even more commision of AUM, I can understand you deserve to be compensated for your work & expertise, however you should charge for WORK by the hour why are you different than any other professionals accountants etc, that charge by the hour no matter how wealthy the client, Why would you charge somone worth ten mil, 100 grand a yr vs net worth 500000, only 5000 a yr if theorticaly you could be doing the same amount of hours work.
Jul 20, 2009 9:43 pm

Advisors and Brokers don't charge commissions. 


Should a stupid advisor who works slowly get paid more than a competent advisor who works quickly?
 
Shouldn't an advisor charge whatever he wants to charge and a client pay only what he wants to pay?  An advisor doesn't have to charge less than 1%.  A client doesn't have to pay more than 1%.  Let the market decide on price.
Jul 20, 2009 9:49 pm

I am sure this will spark a lot of debate but. When i leave my accountants office I am done until next year(and my accountant charges me a flat fee(not unlike an % AUM.. however it's based on how complicated my return is compared to others).



Advisors have to watch an account consistently for ever(or as long as they are clients) Now I don't count someone wrapping funds and calling themselves an advisor. Also most people have a decreasing fee as the accounts approach higher amounts.



"Planners" who charge an hourly fee, then take no responsibility for the outcome is stupid.



I don't believe that fee vs commission is a moral issue. I think it is choice for client and advisors as long as they disclose everything.

Jul 20, 2009 9:58 pm

hey squash of course you should overlook the investments but charge an hourly fee for the amount of hours you put in

Jul 20, 2009 10:11 pm

If I charge $200/hour and I spend an hour doing research into XYZ Mutual Fund, do I charge all of my clients $200?  


 
Why does the fee have to be justified? 
 
However, speaking of justification, shouldn't I get paid more for helping a client turn $1,000,000 into $1,100,000 than if I help to turn $10 into $11?
 
Jul 20, 2009 10:16 pm

does an accountant doing research on tax law or any other professional spending time on improving their service and knowledge charge all there clients? NO

Jul 20, 2009 10:42 pm

They would if they could. 


I've never met an accountant who only charges a flat hourly fee.  The more complexity involved, the more that they charge.  This is true even if it doesn't necessarily involve more time.
 
Hourly simply doesn't work in investment management because as you pointed out in your response, there is no way to bill for the actual work involved.  The time involved per client can be miniscule, but the total hours are not.
 
Like most business owners, we try to structure our fees/commissions in the way that is the most profitable.  This is no different than attorneys and cpas.
Jul 20, 2009 10:43 pm

http://forums.registeredrep.com/forumposts.asp?TID=9043&KW=






 
Its obvious from this thread that you don't know a whole lot about the industry, as you're brand new.  If you're managing a client who has $1,000,000 with you and you get him 9% return, he has made $90,000 this year.  If he's managing it himself and gets 5%, he's made $50,000.  Is it fair to say that if you use your expertise to earn a client an extra $40,000, would it be worth being charged $10,000? 
 
Take it another route:  A person listened to a few co-workers who told him that he should open a Vanguard account and buy a few index funds and he'll be "well diversified" and have low fees.  He put $1,000,000 in the following allocation:  50% - S&P Index fund, 20% - International Index, 20% - Small Cap Index and 10% - Windsor II.  He asked his co-worker if he should buy any bonds.  The co-worker said "Nah, you're only 37 years old.  You have plenty of time until retirement, you can afford to take risk now."  He did this in September of 2007.  His $1,000,000 went to $620,000 last year.  Do you think he would have minded paying 1% to have a professional allocate him properly and lose 18-20% last year, or would he have preferred to keep his fees low and lose 18% more than he had to?
Jul 20, 2009 10:46 pm

There are studies on the habits of buyers. Only 5% shop on price. If you want to be successful, don't market to that 5%.





Jul 20, 2009 10:55 pm

Your previous post says all we need to know. you couldn't charge fees until a while ago. You want to get the CFP(not a complete waste of time, but since you don't have any clients, might want to focus on that first). Lastly you said you had a background in insurance sales, there is an industry that lacks full disclosure. Nothing like getting paid on a policy and never having to disclose to the client what it is.



If we charged hourly fees no one would use us and instead go to vanguard because that would be there only choice. 3rdyr and Anon are right. Let the market decide what they want to pay. I charge a certain fee if you are unwilling(or unable) to pay that then you will have to find someone else or do it yourself. My clients feel it's worth the % of their assets to have me take care of their money. 3rdyr put it best.. the cost is not in how much you pay or get charged but the difference it makes.



What do you feel is fair? All your comments have been attacks. If you were to get a client how would you feel that they compensate you?

Jul 21, 2009 6:10 am

Ambitious, is this a "devil's advocate" type post or have you already made your mind up about this subject?


 
What makes charging an hourly fee "morally superior"?    I would really like an answer to this.  As I always say, "Mode of compensation is simply a business decision."
 
A big issue is that if a planner doesn't make enough money, he won't be able to help his clients.  A planner charging a flat hourly fee can't make enough money to survive in this business.  Take a close look.   The vast majority of planners who use this method either work part time or have a spouse that supports them.   Do you know any exceptions to this?  I don't.
 
What's a fair rate for you to charge?  How many billable hours will you have to have to make the money that you want using this method?  Is it realistic?  Even if it is, does it make sense for you and your family to use this method of compensation if it means that you will make less money?
 
Ambitious, humor us and go through the above little excercise.  I'm curious to see if it is even a realistic possibility for you.
 
Jul 21, 2009 8:03 am
ambitious:
Why would you charge somone worth ten mil, 100 grand a yr vs net worth 500000, only 5000 a yr if theorticaly you could be doing the same amount of hours work.


Something no one has touched on, but this comment is just blatantly wrong.  I spend a lot more time and effort on my A+ clients with 1mil+ than I do with my clients that have 100,000 with me.  It's not the same amount of work.

Jul 21, 2009 8:07 am

eman07, isn't that an argument in favor of hourly billing?  If you spend more time with your big clients, you will make more money from your big clients.

Jul 21, 2009 8:53 am

I forget who said it, but I personally agree that the client is getting more than 1% worth of us when they lose less than they would have in a down market.  And you can't fall back on the "mutual funds never beat the market, so don't pay a fee" crap.  Most people can't/won't allocate properly, so they end up blowing themselves up.  Let's say you have a retiree with $1mm in his nest egg, and instead of him losing 35% last year (and I heard of a lot of people like this losing 65-70% during the dot-com bust), he only lost 15% or 20%.  You just saved him $200-250,000. 

Those are numbers you can't promise, but that's the kind of stuff you save people from - stupid mistakes.  I truly believe we are here to protect people's assets and help them achieve a reasonable rate of return commensurate with their goals and objectives, not "beat the market".  That's where Money Mag, et al, do individual investors a great disservice - convincing them that by just "doing it yourself", you will simply achieve market returns.  Well waht if "market returns" are not your goal?  Then what do you do?  What if you just want your money to grow faster than inflation, without losing money, and with less volatility than the market?  Does Money Mag help you do that?  Will a $200 financial plan do that? 
Jul 21, 2009 9:23 am
anonymous:

eman07, isn't that an argument in favor of hourly billing?  If you spend more time with your big clients, you will make more money from your big clients.


No, it's not.

I was just saying that he was arguing that you are charging your high AUM clients so much more than you're lower AUM clients, for the same product.  I'm just saying, that's not the case.

Jul 21, 2009 9:39 am

Most CPA's I know do not charge by the hour, they charge based on complexity, often based on which tax return schedules are needed, # of inputs (i.e. income sources) if it involves a business return, etc.  And most have a minimum (most that I know are at $500 minimums - even for simple 1040's).  So you have a small firm doing 1500 returns, you're looking at a few million in revenue.  And you probably employ a few CPA's (or EA's) and some preparers/checkers during tax season.  Throw in a little audit work, some bookkeeping and payroll services, some tax "advising" during the year, and each partner nets a few hundred thousand a year.  Not a bad gig.

Jul 21, 2009 10:27 am
B24:

I forget who said it, but I personally agree that the client is getting more than 1% worth of us when they lose less than they would have in a down market.  And you can't fall back on the "mutual funds never beat the market, so don't pay a fee" crap.  Most people can't/won't allocate properly, so they end up blowing themselves up.  Let's say you have a retiree with $1mm in his nest egg, and instead of him losing 35% last year (and I heard of a lot of people like this losing 65-70% during the dot-com bust), he only lost 15% or 20%.  You just saved him $200-250,000. 

Those are numbers you can't promise, but that's the kind of stuff you save people from - stupid mistakes.  I truly believe we are here to protect people's assets and help them achieve a reasonable rate of return commensurate with their goals and objectives, not "beat the market".  That's where Money Mag, et al, do individual investors a great disservice - convincing them that by just "doing it yourself", you will simply achieve market returns.  Well waht if "market returns" are not your goal?  Then what do you do?  What if you just want your money to grow faster than inflation, without losing money, and with less volatility than the market?  Does Money Mag help you do that?  Will a $200 financial plan do that? 
 
 Boo-yah.
Jul 21, 2009 10:37 am

Some people offer breakpoints on the AUM percentage fee. For example, I would never charge someone with $100k only 1%.

Jul 21, 2009 11:37 am

Actually, I do know what I'm talking about.  First off, I said a few CPA's, as in maybe 3 or so.  Add to that some preparers and checkers, and there you go.  I have a friend who is an EA.  She bangs out 800 with no other registered (CPA or EA) people in her office.  She has 3 preparers and 3 checkers.  She's not doing most of the heavy lifting herself.  I know a 3-man office that does about 500 (one CPA, two preparers). 

Don't know whether it's the norm or the exception, I just know it's being done.
Jul 21, 2009 11:54 am

thanks guys for all your answers its an interesting debate, Uderstand I am not criticizing anyone just trying to understand and learn, I am new to this and in the process of structuring my compensation schedule and want to do the right thing, BTW the reason hourly billing can be looked as morally superior, is that it TOTALLY takes away the conflict of interest, same argument fee only planning make against commisions that there is a conflict of interest to recomend products that make the broker more commision, Can be argued against fee, There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else