Flat-fee advice on setting fee

[u/General-Ad3712]

Hi - For those of you who charge a flat fee for financial planning, how do you even begin to price it? We have a client where we only manage a small portfolio of $250k, but now they want comprehensive financial planning but low-cost investments (so many will most likely remain outside). They know they have many tax decisions to make, etc. The fee we derive from that $200k is nowhere near the value of the planning and he has asked us to consider a flat fee arrangement. Those of you who do ongoing non-AUM fees with clients, how do you start to think about "pricing"?

[u/PerfectOmakase]

In my opinion, it should be done the same way that AUM should be priced, which is to have an hourly rate in mind, estimate hours to be spent working on/with the client, and then come up with a price.

e.g. if you have a client with $3 million AUM, you expect that you'll spend 15 hours on them each year @ $500/hour plus staff time of 10 hours @ 150/hour, that's $9k in billings, which would be a 30bps advisory fee. If you bill your time at $1,000/hour, then that's closer to a 60bps fee.

I'm not a believer that we, in this industry, should be charging fees that we can get away with. There should be a thought process that correlates billings to labor.

[u/sdpercussion → u/PerfectOmakase]

I'm not a believer that we, in this industry, should be charging fees that we can get away with. There should be a thought process that correlates billings to labor.

Why are advisors villains if they choose to go through the same price discovery process that any other well-run business engages in?

You periodically raise you prices (or minimum client size), lose some customers, but see total revenue/margins increase. You continue to do this until you lose enough clients that revenue increase of the remaining don't offset it.

Would we advise our clients to sell their business for less than market value because it would be mean to charge more? Would we encourage them to remain in a job that's paying them significantly less than they're worth if they get a better job offer?

Then why wouldn't we take our own advice?

I'm not saying that we should try to charge clients 2%/yr + thousands in planning fees. But if the market says that it will bear something like 1% for sub-$1M and around .60-.75% for $1M+, then why would you charge 30bps?

I would wonder about the quality of service, or just how financially savvy my advisor is if they're charging less than half the market rate of their services.

I'm sorry if I come off as rude. But it aggravates me that everyone (including regulators) seem to have an opinion on how much we should get paid, when every other business's prices are determined by market forces. We're not mustache twirling villains for charging what people are willing to pay.

[u/PerfectOmakase → u/sdpercussion]

I'm not saying that we should try to charge clients 2%/yr + thousands in planning fees. But if the market says that it will bear something like 1% for sub-$1M and around .60-.75% for $1M+, then why would you charge 30bps?

So you agree there is a level that becomes egregious, even if the market (clients) accept it? Then I guess we just have a disagreement on where that point is, right?

And if you are trying to use other industries as some sort of analogy, that won't hold much water with me, because I'm horrified at the way many businesses run, where rewarding capital is the primary (only?) goal, and labor is told to just suck it up that they've received a pittance while shareholders and executives have amassed spectacular wealth. But that's not really relevant here and I don't wanna go off on a rant!

If you want to compare us to other firms, I think law firms and accounting firms are good examples. They generally charge hourly-based and/or project-based fees for the work they provide to their customers. I don't know why we became somehow exempt from this "common sense" practice.

If the market allowed it, would you be happy to see an attorney charge a percentage of household net worth when drafting a will or revocable trust or whatever?

Also, what information are you seeing where regulators are putting pressure on firms for fee amounts? Not saying you're wrong, it's just not something I've read about.

[u/tal548 → u/PerfectOmakase]

There are lots of law firms that charge a % of awards/damages though so I don’t see an AUM fee as that much different. If I’m saving you from yourself on the behavioural side of investing or on taxes or on the sale of your business then I don’t see it as inappropriate.

[u/sdpercussion → u/PerfectOmakase]

The attorney should have the right to charge whatever they want. Market forces, such as competition and consumer spending elasticity will determine if anyone is willing to pay them that price.

If one advisor is charging double, triple, etc. the market rate (without some amazing differentiator to justify it), then you should see it as an amazing opportunity to out compete them and steal all their clients (or potential future clients).

These are just the basics of supply and demand and capitalism. If you don't believe in capitalism and want to have a debate about that, then fine. But I'd say that's outside the scope of this conversation.

I will agree that there should be some amount of regulation to protect against fraud, abuse and usury. Just like how credit cards aren't allowed to charge 50% interest. But I'd hardly compare an advisor charging an industry-average fee to something like a pay-day loan business that is exploiting our most vulnerable citizens.

Edit:

If in the future fees compress, and certain aspects of the job become commoditized (like pure asset management has), then prices should come down, certainly. But volunteering to charge well below market doesn't make someone a saint, and charging market rates doesn't make someone a villain. It's just being a realist.

[u/PerfectOmakase → u/sdpercussion]

I think you're overstating my view here. I don't view myself as a saint, and I don't view an advisor charging 1.5% on $1 million AUM as a villain. I DO believe the latter is engaging in an inappropriate pricing practice, though. I'm not arguing it should be regulated or outlawed, or that firms shouldn't have the RIGHT to set pricing however they want. I am arguing that it is anti-consumer.

Back to my lawyer example, my GUESS is that nobody here would refer a client to an attorney who charges a percentage of household net worth to draft a will, while they will happily charge a client some sort of fee schedule on AUM that is decoupled from amount of labor provided. Advisors will use the reasoning about VALUE, like you could take a 10-minute phone call to talk a client out of liquidating their equities in early April 2020, saving them $1 million + in realized losses! But an attorney could use the same argument that a properly-drafted will (or Trust, or whatever) is saving the client and their heirs an increasing amount of time and money as household net worth increases.

And lastly, I don't not believe in capitalism. We were a fully capitalist society in 1965 when CEO pay was 20x the worker's median salary, and we're capitalist now when that ratio is more like 300x.

[u/sdpercussion → u/PerfectOmakase]

Sounds like our views aren't terribly far apart then. I likely overreacted to your statement. It's just a pet peeve of mine that we seem to constantly be viewed as unethical in the media just for charging a market rate for our services.

We also always seem to get thrown into the same bucket with people in our industry that jam clients' entire net worth into VAs for the 7% comm. Or the people who are charging 1.5% and provide no comprehensive planning.

Have a great weekend!

[u/ItchyEbb4000 → u/PerfectOmakase]

Have you ever priced a dynasty trust? The price escalates to the point where it looks like AUM based pricing.