What Is Your Fee Schedule?

Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy tell me about your assets under management model.

Andy:

Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value like they did in 2018?

Andy:

The fee will go down if the accounts drop in value. My income will be lower as well.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, your fee will run $4,000 to $5,000?

Hank:

Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.

Nate:

Thanks Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.

Nate:

Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?

Rebecca:

That’s correct. It’s based on income.

Nate:

How long do your client’s pay a retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients stay with us for about three to five years before they move on.

Nate:

What if a client wants to invest based on your recommendations?

Rebecca:

We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.

Nate:

Give us an example please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but we encourage our clients to be long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.

Nate:

Thanks Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

That is true. However, we have an account minimum of $500,000.

Nate:

If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.

Frank:

Well, the fee is more than asset management fee. I also get paid for advice and financial planning.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.

Nate:

Thanks Frank.

Nate:

Let’s her from Patty. Patty tell us about your fee structure.

Patty:

Thank you, Nate. I only charge client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it look like?

Patty:

The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity.  Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year, or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year, or $500 per month.

Hank:

For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.

Patty:

This planning fee for this client, based on her assets, would be $5,000.

Nate:

Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you’re all getting paid?

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

April 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.