Advice at a Price
THE PREDOMINANT WAY financial planners get paid is by charging a fee based on the amount of money they���re managing. The typical��industry fee I���ve seen is 1%, and it���s been that way for years. Under this model, a financial planner managing a client���s $1 million portfolio would charge $10,000 a year.
Charley Ellis���s recent article explained how this approach came into being. His article also demonstrated how a seemingly innocuous 1% fee can actually consume a large portion of a portfolio���s return. This drag on performance compounds over time.
The positive side of the model: A financial planner���s interests are aligned with the client���s. If the portfolio���s value climbs, both are better off. If it falls, the planner also makes less. An additional benefit: Clients know roughly what they���ll pay for the planner���s services in any given year.
Many planners provide a full suite of services for this 1% fee, including tax planning and preparation, estate planning, insurance planning, retirement planning and hand-holding during rough financial times. In the percent-of-assets model, clients feel as if they���ve already paid for these services and so are more likely to use them.
Still, there are other ways a planner could be paid. These include paying an hourly rate���typically a few hundred dollars per hour���for specific services. There are subscription services, with a fixed cost per month. Some companies also offer certain services or products for a fixed fee. Finally, some planners sell products, like mutual funds and insurance products, that earn them a commission.
Some of the largest names in the financial planning industry have gotten involved in the planning side of money management. Vanguard Group���s Personal Advisor Services charges a maximum 0.3% of asset per year. One of the country���s largest financial planning firms, Edelman��Financial Engines, has a ���wrap fee��� program with a sliding scale for new clients. It starts at 1.75% on the first $400,000 and drops to 0.5% on $10 million to $25 million.
I know a planner who primarily has percent-of-assets clients but also charges by the hour for consultations with clients who aren���t ready to hand over the reins of their portfolio. I���ve wondered if a hybrid model���percent-of-assets plus by-the-hour charges���would work. If you want portfolio management, you���d pay a small percentage of assets. For the other items, you���d pay an hourly fee. The total bill would be based on how complicated your situation is and the services you request.
But I can also see drawbacks with a hybrid model: If we had to pay individually for each additional service, how many of us would opt for the exciting part���setting up and managing an investment portfolio���and skip the boring parts, such as insurance planning? Indeed, the first article I ever wrote for HumbleDollar��was on a related topic: I noted that too many of us equate financial planning with investment management. That problem, alas, still exists.
Charley Ellis���s recent article explained how this approach came into being. His article also demonstrated how a seemingly innocuous 1% fee can actually consume a large portion of a portfolio���s return. This drag on performance compounds over time.
The positive side of the model: A financial planner���s interests are aligned with the client���s. If the portfolio���s value climbs, both are better off. If it falls, the planner also makes less. An additional benefit: Clients know roughly what they���ll pay for the planner���s services in any given year.
Many planners provide a full suite of services for this 1% fee, including tax planning and preparation, estate planning, insurance planning, retirement planning and hand-holding during rough financial times. In the percent-of-assets model, clients feel as if they���ve already paid for these services and so are more likely to use them.
Still, there are other ways a planner could be paid. These include paying an hourly rate���typically a few hundred dollars per hour���for specific services. There are subscription services, with a fixed cost per month. Some companies also offer certain services or products for a fixed fee. Finally, some planners sell products, like mutual funds and insurance products, that earn them a commission.
Some of the largest names in the financial planning industry have gotten involved in the planning side of money management. Vanguard Group���s Personal Advisor Services charges a maximum 0.3% of asset per year. One of the country���s largest financial planning firms, Edelman��Financial Engines, has a ���wrap fee��� program with a sliding scale for new clients. It starts at 1.75% on the first $400,000 and drops to 0.5% on $10 million to $25 million.
I know a planner who primarily has percent-of-assets clients but also charges by the hour for consultations with clients who aren���t ready to hand over the reins of their portfolio. I���ve wondered if a hybrid model���percent-of-assets plus by-the-hour charges���would work. If you want portfolio management, you���d pay a small percentage of assets. For the other items, you���d pay an hourly fee. The total bill would be based on how complicated your situation is and the services you request.
But I can also see drawbacks with a hybrid model: If we had to pay individually for each additional service, how many of us would opt for the exciting part���setting up and managing an investment portfolio���and skip the boring parts, such as insurance planning? Indeed, the first article I ever wrote for HumbleDollar��was on a related topic: I noted that too many of us equate financial planning with investment management. That problem, alas, still exists.
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