Month: December 2021

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

Our distinguished panel includes 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 of whether 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 fee is a function of the assets we manage for our clients. The fee, as a percentage, will drop as our client’s assets grow. The fee includes financial planning and investment management; it’s all included in our fee model.

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 as they did in 2018 or March 2020?

Andy:

The client’s fee will decrease if the account value drops; my fee will also be lower.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting typically lasts one hour. The financial plan, preparation, and presentation usually take 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, the client’s projected fee is $4,000 to $5,000?

Hank:

Yes, that’s correct. It could be more or less depending on the project or the complexity of the client. Some clients come to me for an investment review, others for a full-blown plan. My fee also includes driving time, research, lunch, 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 – like a car or mortgage payment. The client can add my fee to their monthly budget as they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, depending on income. We require our clients to sign on for a one-year commitment.

Nate:

Interesting. So, if someone’s income is $50,000, your retainer fee will be less than someone earning $500,000, correct?

Rebecca:

That’s correct. Our client’s income determines the fee they pay.

Nate:

How long do your clients pay your retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients typically stay with our firm for three to five years.

Nate:

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

Rebecca:

We don’t manage money. We refer our clients to another fee-only advisor or recommend a robo-advisor platform, like Betterment.

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 straightforward fee model. If a client places a trade, we charge a commission.

Nate:

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

Cindy:

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

Nate:

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

Cindy:

The commission on a mutual fund trade 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 the annuity during the deferred sales charge period.

Nate:

Give us an example, please.

Cindy:

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

Nate:

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

Cindy:

It’s a high fee, but our clients are 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. Individual stocks or bonds don’t have any fees after the initial 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:

Yes, sir. However, we have an account minimum of $500,000 because we only work with high-net-worth clients.

Nate:

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

Frank:

Well, the fee is more than an asset management fee. I also get paid for advice and financial planning. We also offer a concierge service to help our clients with dry cleaning, walking their dogs, or obtaining tickets to sporting events.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds and ETFs.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

It depends on the custodian – some charge, others do not. The fee can range from $10 to $45 per trade, which goes to the custodian. I don’t receive any portion of the custodian’s fee.

Nate:

Thanks, Frank.

Nate:

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

Patty:

Thank you, Nate. I only charge a 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 as Rebecca does.

Nate:

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

Patty:

The financial planning fee ranges from $2,500 to $25,000, depending on a client’s complexity.  Once complete, the client is free to choose any investment platform they want. I’ll give them a few 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. To compare the different models, let’s look at a client with $500,000 in assets and an annual income of $250,000. 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:

I will charge $500 per hour for 10 to 12 hours of work during the year, so our 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. It would be $5,000.

Patty:

This planning fee for this client, based on the 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 costs are similar, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you get 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

December 2, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management 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. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.