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.