The Four Sources of My Income
I’d like to begin this blog by recapping my progress to this point. My business income will come from four primary sources.
First will be financial planning fees. These fees, on a per client basis, will range from a few thousand dollars to several thousand dollars per year. It will not only cover the initial planning phase but will allow for ongoing advice throughout the course of the year.
Another source will be from the management of client assets. Currently I have one fee schedule but will create an additional schedule soon. I’ll use one if the extent of my service is portfolio management and the other will be for clients who have also hired me to be their planner. In this case, the asset fee will be slightly reduced since I am also collecting financial planning fees.
A third area will include insurance, mainly life and long term care.
The final area is a slight departure from the traditional wealth management arena. Here’s one example. I am currently in discussions with a large engineering company. They produce estimates for their clients on projects that may be $10 million, $20 million, even as much as $100 million. The estimates project the total cost of the project and are calculated on a linear basis using static assumptions. I will add Monte Carlo simulation to their quotes, giving their clients a better and more realistic understanding of the projection.
Using probability analysis, we can assess the probability of the project’s cost exceeding the initial projection. My fee for this service could range from $2,000 to $10,000 per occurrence. If you’d like to know more about this process, you can refer to the September 2006 article in Investment Advisor entitled “Risk Manager”. There I outline how I use this same capability in financial planning.
On another issue, as an RIA I’m faced with the task of deducting the asset management fees myself. I’ll have to create a system to do this efficiently. I will get the balance of a client’s account at the end of the period (e.g., monthly or quarterly), multiply it by the applicable fee %, go online with my RIA custodian, and deduct the fee. One way to do this is to create an Excel spreadsheet with my clients’ names and annual fee %, paste their account balance in the sheet, and calculate the fee. Then I’ll need to deduct it from their account. For those of you out there in a similar situation, how are you handling this?
Next week I’ll share an interesting discovery I made concerning the frequency of the asset fee deduction.
I encourage you to log in and post a comment. Let’s make this a valued resource for all those facing similar issues.
Thank you for reading and I look forward to hearing from you.
Hi Mike, In reference to fee deductions, I was using Captools for performance reporting which also did the fee calculations. Due to Captools being very labor intensive I have switched to the performance reports that my custodian has available(provided by Pershing) Once the calculations were done I would put them into an spreedsheet and then fax them to my custodian who would then deduct it from the clients account and deposit it into my master account. The only difference know is I had to creat an excel spreadsheet with the fee % so all I have to do is paste the clients balance in it and it will calculate the fee. I then just have to fax it to the custodian and they do the rest. I feel that having to calculate the fees this way is a small price to pay for the benifit of have the custodian handle all of the preperation of the quaterly performance reports including the mailing of them.
David M. Lyons
Lyons Asset Management
Lake Charles, LA
Mike,
The billing process used by an IA is one of the most audited procedures by the regulatory agencies. This should tell you that many advisors don’t have a consistent methodology. Whatever method you decide on make sure it is mathmatically sound, and most important auditable.
You can as David Lyons suggested use a spread sheet provided by your cutodian or rely on the simple but effective excel program designed for what you need in YOUR practice. If you use Excel have someone other than yourself verify the math. The regulators look at this first! I prefer my own Excel program which gives me control for the future.
You didn’t ask but there are several other things that go along with billing clients. What does yor ADV say about your billing process? Don’t deviate from your ADV schedule. Change your ADV first before changing your billing system. What does your ADV say about refunds? I suggest that you have a policy which states that after receiving a written notification of termination that your refund period is based on date of notice + 30 days minus the number of days left in the billing period. Does your billing period use 365 or 360 days as the denominator? Make sure this is clearly explained in your ADV. Change your billing process only AFTER changing your ADV. This may be a material change and if so you’ll need to notify all current clients within 30 days of the change.
You see Mike this is not only about running your business but learning the process of meeting your legal obligations to your clients which I contend is a more difficult chore.
Stanley Hargrave
Hargrave & Associates LLC
Riverside, Ca. 92507