“Pricing is actually a pretty simple and straightforward thing. Customers will not pay literally a penny more than the true value of the product.” -Ron Johnson
In the hunt for non-commission, service based fee models, there are two main categories based on service desired.
If we are seeking one-time service, ideal options are:
Paying a project-specific fixed fee. This could be a fixed price for a financial plan. It may include answering detailed questions with supporting research and documentation. Or, perhaps doing a full investment analysis or second opinion on a portfolio. There are many examples, but the key is to define the scope of the project and get a specific price quote to accommodate the request.
Paying by hourly rate. This method is as it appears. Pay by the hour is a price quote for service based on time worked and a price per hour for that time. This form of payment is ideal in situations where scope and time can be precisely defined. It tends to be terrific for very short term engagements and a terrible option for both parties in long term engagements. In the short term, it incentives all the right things. In the long term, it encourages all the wrong things.
If we are seeking a long-term planning service, ideal options are:
Paying by agreed upon retainer. In this arrangement, the client and planning professional determine an annual (or quarterly or monthly) fee that fits the engagement. It can be based on formulas of income, net worth, assets, etc. In this situation, the client is literally hiring the planning professional to work on their personal advisory team. The planner becomes a quasi-employee of the client’s family. This method is picking up in popularity, makes great sense, and aligns incentives. The downside is that the general population lacks understanding and familiarity with this method.
Paying by a % of AUM (assets under management). This tends to be the most common and familiar method used. In this arrangement, the client prefers the fee to be based on a % (typically 1% or less) of the investment portfolio. This fee gets paid from the investment accounts direct. This structure does put the planner and client on the same side of the table. The planner is incentivized to help the client grow their financial assets. Over time, this method yields positive results. The challenge can be the lack of link between the actual financial goal plan and the investment portfolio. It can work well where a specific financial planning firm has a philosophy where the plan is used to dictate the portfolio. If the portfolio is primary, then this arrangement can be a difficult one to serve the client well.
In the end, it all comes down to value and incentives. Which method fits us best and provides with most probable value for what we pay. We want our advisors to be incentivized to work in our best interests. We also want them to provide high value relative to the price we pay. We can have both.
There are ways to enhance the likelihood of proper fee methods. Look for independence. Look for planners who are owners. Look for planners paid based on traditional salary or ownership models. Steer clear of those paid based on sales models.
How can you know what you’re getting? Well, do your research. Make disclosure a requirement. Ask, listen, and get it in writing. Most of all, use common sense. If it looks like a duck, walks like a duck…..it’s a duck.
There are all kinds of resources and options for us to make informed decisions. If we’re looking at independent financial planning firms, these specifics will be disclosed. It’s required and the firm’s philosophy insists on it.
The proof is in the pudding. If these options exist at a place we’re interviewing, then that’s a sign. If there are no mention of these options or if they don’t exist, that’s information too. At the end of the day, it’s all about making an informed decision. We must be empowered by first knowing and learning. Get the information.
Make sure interests are aligned. Pay for service the method best suited for your family. Ensure that value will be provided, at the right price, and delivered the right way. The right way for us, as individuals.
“We get paid for bringing value to the market place.” -Jim Rohn
