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.
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.If I'm working with someone on a fee-only basis, my professionalism is identical to what I display when I'm selling commissioned products.
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.”Yes, there is. So what? There is a conflict no matter how we charge. Fee-only planner (no AUM fees): If they charge hourly: Slow work = more fees. Less knowledge=More fees (more time spent researching) If they charge by the project: Earn more money by doing things quickly. Incentive to boilerplate as much as possible. Regardless of how the Fee-only planner charges, it puts the client in the position of paying both fees and then having to work with someone for commissioned products (insurance). Fee-Only planner (with AUM Fees): All insurance recommendations cause them to make less money. All recommendations to keep money in the bank cause them to make less money. All recommendations to pay down debt causes them to make less money. All SPIA recommendations cause them to make less money. Commission-only planner: Only makes money by selling commissionable products. Personally, I don't think, when it comes to conflicts of interest, that mode of compensation is the most important factor. I think that it comes down to the ethics and the personal financial standing of the advisor. Let me give you an example. Ice and Moraen are both advisors. Ice works on commissions. Moraen charges an hourly fee. Anonymous is looking for an advisor. Ice is going to make $1,000,000 this year. He only spends $300,000. Moraen needs to bring in more income to just make his minimum payments. Who is more likely to give objective advice? I find "mode of compensation" to be nothing more than a business decision. (For the record, I walk both sides of the aisle on this topic. I'm not a fee-only advisor, but people can and do hire me on fee-only basis. When someone is paying a fee, how does the advice differ? It doesn't. What is different is that they get a pretty looking financial plan.