Charging Hourly

I have a good friend that’s RIA. He charges hourly for financial plans (though I think it’s mostly a flat fee), but typically waives it if they become asset management clients. To me, it seems like a great way to bring on new clients…here’s a “plan”. It costs $1500. YOU will have to implement it. If you want ME to implement it (i.e. manage the assets and give ongoing advice), it will cost 1% on an ongoing basis. I have brought on a few clients that had a “plan” done, but the planner had no interest in implementing it (probably because at the time, it appeared that these clients didn’t have much in investable assets - but didn’t realize that they could do an in-service rollover from their 401K). So I ended up scrapping the plan (which was fine) and doing my own. The problem with the plan, especially all of the asset management piece, was that it broke down investments by style box on the efficient frontier, etc., but it did not give any direction on how to actually FIND those investments, BUY those investments, or MONITOR those investments. So this couple comes to me like, “OK, so now what do we do?” The “plan” was just under 350 pages. It included financial statements, retirement, insurance, education, estate planning, etc. it was fine, but just damn overwhelming for the average person. I typically only use the Financial Statemnt and Retireent modules unless they really need the others formalized. But most of the time, we can do back-of-the-napkin calcs for life insurance, and education usually ends up being “whatever is left over” money that gets put into 529’s. Most of my clients are not interested in funding $150K worth of education.

An RIA can certainly charge by the hour, or project, or whatever, so long as it’s properly disclosed on his ADV.

As to whether or not you would choose to do this, and how many hours you might require to make it worth your while, that is a separate issue.  This type of comment seems to come from those who are essentially DIY’ers anyways, or too cheap to pay a reasonable cost for advice, so are often not what I would consider ideal clients anyway, regardless of their assets. 

But at least it is possible, and your decision to make based on your criteria, whereas I don’t know of any wires who allow hourly billing. 

And as B24 mentions, it is not uncommon for RIAs to charge for a plan, but I took this question to be directed more at the occasional prospect who just wants to pay by the hour and then implement themselves.  There is a whole network of “planners” who charge only by the hour, who belong to a group formed by a planner named Sherry Garret (if I recall crrectly).  Few of them make a decent living doing this, but to each his own.

[quote=snaggletooth]I received a lead of a guy with a $2MM portfolio that wants to be billed hourly.

I billed by the hour several years ago. I will never do it again!

Wants to be billed hourly for what is my question?  If he wants to seek advice and let you be a consultant to him for it, why not charge him an hourly fee for your time?  But, if he wants to be charged an hourly fee for you to manage his assets…come on?  I don’t get that.  Typically, as already stated on the thread, hourly billing happens for planning or consulting; not asset management.

At LPL you can charge by the hour, or you can charge a flat fee for a plan (up to $15K).  You need a 66 or 65, and you will be using LPL’s RIA.  Also, to charge by the hour, LPL requires an advanced designation (CFP, MBA, CHFC, etc.), or over 8 years in the biz.

Why you’re at it, tell him your wife sells Mary Kay

[quote=Greenbacks]I billed by the hour several years ago. I will never do it again!

[quote=Hank Moody] [quote=snaggletooth]I received a lead of a guy with a $2MM portfolio that wants to be billed hourly.

I’m with Hank on this one…he sounds like a cheap SOB to me.  Feel free to explore further exactly what he’s after, but if he wants you to manage his portfolio by the hour, I’d tell him that’s OK, but my minimum annual fee is $X.  My guess is, he thinks you should do everything for a couple hundred bucks a year.  I just fired a client like that and it felt really good…I still smile everytime I think of firing that cheap SOB.

So I talked to this cheap asshole and got him to think about annuities, which he said he liked.  He then went to another advisor who he asked his opinion about annuities, and the advisor basically said if he wanted to do an annuity, he should do one through Vanguard.

I typically “audit” the amount of time I spend on a client case the first year.  I am fee based, and charge additional flat fees for analytical work.  At the end, I back out any time spent on the client that is based on the thoughts, research or discussions of any investments held within a wrap fee program (cannot charge twice for same service).

[quote=Amp2Indy2006]I typically “audit” the amount of time I spend on a client case the first year.  I am fee based, and charge additional flat fees for analytical work.  At the end, I back out any time spent on the client that is based on the thoughts, research or discussions of any investments held within a wrap fee program (cannot charge twice for same service).

[quote=Borker Boy][quote=Hank Moody] [quote=snaggletooth]I received a lead of a guy with a $2MM portfolio that wants to be billed hourly.

B24, great post.  A good advisor brings great value to their clients and it has nothing to do with picking superior investments. 

Charging annual fees does not appeal to me, but I think that those who do that should be able to charge as much as they can. Conversely, the public should only pay what they want to pay. If you want to get paid 3% and your client agrees to it, more power to you. 

Sounds like a good candidate for a retainer based relationship.  If you are truly providing advisor services and not just selling products why not?  The legal profession has used this model for years.

I think the best application of hourly services would be for ‘clean up’, or single use services for some people.



We had a client pass away recently. The estate was to be fully distributed to a charity, with some smaller beneficiaries being nieces, nephews and brothers and sisters. When all was said and done, we billed hourly for date of death preparation, meeting time with the attorney and CPA, and some other time explaining to the executrix the process of how probate works, and some other stuff.



We bill at $225 per hour - we have a CIMA, CPA and 2 CFP’s in my practice - so, it’s worth the money. Besides, when it was our recommendation to liquidate the portfolios in September of 2007, since there was NO benefit in accepting market risk on behalf of people that would be getting the money in the short-term, the advice proved very valuable (saved beneficiaries $200k). Since the funds were parked in the money market, how were we going to be compensated… an asset-based fee in this case? No… but, we did bill for any time that was spent dealing with all the other matters.



I also think that cost basis research, and other items that involve estate planning recommendations (i.e. how should an estate plan be structured…) are well within the scope of my practice charging an hourly fee.



I’m against taking on a new client that would prefer an hourly arrangement… and we flat out just don’t do that type of business…, but people that need assistance with a 401K that we don’t have, makes sense on an hourly basis. 401K plans that are looking for asset allocation assistance, can pay us to do due dilligence on their fund groupings, and we bill the company directly for this service.   Also, what about 401K participants and employee education events? We take the laptop, the analytics software and a projector, and spend 4 hours talking (in different modules) about stocks, bonds, funds and asset allocation… all ‘billable hours’, as we have it structured.



We get paid for our time… apart from our advice, time is the most expensive thing you can waste.



C

Maybe Borker has an interest in changing the industry model.



I think everybody has been to enough meetings wherever they are to start to believe their own crap. “You need to be a life planner” or “I help you manage your emotions”.



Everybody thinks their clients are idiots. That’s because you treat them like idiots. If you want to be an “advisor”, then be an advisor. And get paid as an advisor, not as a broker.



Any firm that charges commissions should take “advisor” off of their business card. And if you charge a percentage of assets under management, and don’t do anything to add value other than “tactical changes”, then you don’t have any business charging 1%.



Hourly and flat fees make you more of a professional. I know I’ll get plenty of arguments as to why charging a fee for assets under management is, in fact professional. But really, it only is when you are actually managing the assets.



Borker seems to be the only person on this forum who is able to rethink the way the entire industry works.



As for cashing out at the bottom, if you were really doing your job, you would have had him partially in cash a long time ago. Buy and hold is broken, based on a flawed theory. Buy and hold and then say “you need to hold on” is ridiculous. Old people aren’t long-term investors.



Someone needs to say it. The Markowitz theory is a joke. Someone, of course will of course scream blasphemy. “My clients are only down 10%” or “my clients have made money”. That’s great, but I’m sure it wasn’t asset allocation that made that happen. In this market, it had to be security selection.



Why are all the “great” funds, flat over the last ten years?



Really, if you want to be an advisor or planner, you should charge hourly or a flat-fee. If, in addition to providing a “plan” and helping them implement it, you are managing the portfolio (either with your own models or ones that someone developed for you), then by all means, charge a percentage of assets under management. After all, you’ve earned it.

Moraen, does your post mean that if I earn money from helping my clients with insurance products, I can't be a professional?  If I'm not a professional, does that make me an amateur.  As an amateur, do I get my college eligibility back?

anon- you can, in fact get your college eligibility back.



when you sell insurance, is it part of the planning process, or are you just trying to sell an insurance policy?



there is nothing wrong with commissions in general, even for investments as long as your clients are AWARE OF THE ROLE you are taking. don’t claim you are a protection PLANNER or ADVISOR if you take the commission.



are you an advisor, or an insurance salesman? when you take that commission, you become an insurance salesman.



now, let’s say you developed a plan than included an insurance policy and did the research and found the best policy. do you have a selling agreement with that company? are you appointed?



what if the best insurance policy for that client is offered by Nationwide and you aren’t appointed? are you going off suitability rules or what’s best for the client?



these are questions you should ask yourself. if you can answer, unequivocally, that you are doing what is in the best interest of your client EVERY time, then you are an advisor.



if not, you’re a broker.



And let me clear up my previous post. You are still a professional as a broker or salesman. You are just not a professional ADVISOR or PLANNER.

What happens in your role as an advisor if you have determined that a commissioned product is what’s best for the client?

Ice- a lot of what you say makes sense.



I have an MBA as well, although as an undergrad I was a chem major. I also have all applicable licenses as well as being a CFA charterholder.



There are always situations that won’t exactly fit the mold. You mentioned divorces. Is the person NOT going to go through with the divorce because it may cost them $20,000? Unlikely. They will pay the $20k and count it cheap. What’s the old saying? “Why are divorces cheap? Because they are worth it?”.



I agree that you should get paid at LEAST $150/hr. With your background, closer to $200/$250.



People may balk at paying $150-$250/hr, but if you are worth it, they should pay.



Your value is in your SERVICE, not the products or solutions you provide. So someone needs to stay on track for 30 years. First of all, how many times have you changed your track? People don’t stay on the same path. Assumptions must change, projections must change, models have to change.



Every time you help them do this, you are entitled to a fee. However, if someone HAPPENS to stay to the path you have laid for them, why should they pay you more? Why should they pay you a percentage of their assets under management?

anon- refer it to an insurance salesman who can offer the best product. or if you are also an insurance salesman, make sure you tell them about your conflict of interest.



your job is to keep your eye on the whole pie.

Why should we care about being more of a professional (your definition of one)?  Shouldn’t we care about doing what’s in the best interest of our client while doing it in a way that allows us to take care of our own family?  I’m sorry, but I find it laughable that the mode of compensation has anything to do with one’s professionalism.

So you say. But you have to admit, there is a conflict in selling commissionable products.



I’m glad you can separate what’s best for your clients and what’s best for you. However, there should be a standard for the industry. Not everybody is as altruistic as you are.



What I find laughable is that just because it’s been done this way for so long, that it can’t be changed. I feed my family quite nicely without selling products and make quite a good living I might add, depending on the level of service people demand.



I’m not telling you that you aren’t professional. Just that if you are selling a commissionable product, you are a professional salesman. Not an advisor.



What is the difference between the National Security Advisor and a lobbyist for Blackwater? Blackwater is trying to find a solution to the government’s need for private security in Iraq by using their contractors. The National Security Advisor is concerned with the security of the entire nation.



This doesn’t make the lobbyist a bad person. Just someone who is trying to “feed their family” by selling a product.



The National Security Advisor also feeds his (or her) family. But his job is to “advise” the President on the correct action, not the one that will pay him the most.

Ice - precisely my point. We need to get people to see what they need.



But it needs to be an industry-wide effort! You hit the nail on the head.



Let’s get people to rethink financial services. It can work, but it won’t work if we cling to dead models that don’t benefit the vast majority of people.



What Borker Boy is hinting at is a revolution in the industry. Old timers will say that it isn’t broke, so don’t fix it. But it is broken!



We need to get people to realize that and that they truly do need this professional service. But we have to start with ourselves.

“But you have to admit, there is a conflict in selling commissionable products.”