The Source and Structure of Fees
We had some good discussions in this space over the past few weeks about the frequency of the advisor fee deduction. This week I’d like to focus on the source and structure of our fees. Where do you derive your fees from and how do you structure them? For instance, if you do financial planning, do you charge a fee for this service or not? If you do charge, what is the range of your fee and if you don’t charge, why not? If you manage client assets, how do you charge for this? Do you charge a percent of assets, commissions, or maybe a flat rate based on the account or relationship size? Here’s how I am doing this.
Comprehensive Financial Planning
I offer comprehensive financial planning and charge a fee ranging from $2,000 to $5,000 for the first year. This covers the initial plan and ongoing advice throughout the year. Here’s a good example of “ongoing advice.” I had a client tell me the other day that he had received a letter from the IRS informing him that he owed additional taxes. It seems he had under-reported some dividends or capital gains from a few years ago and as a result, owed several thousand dollars in additional tax, plus interest and penalties. I offered to look this over and basically reconcile the numbers, to which he agreed. I consider this to be part of our agreement. I want him to think of me whenever he has any financial issue. Going forward, I plan to update the plan annually, check the progress, determine if any changes are required, and charge an annual fee for my service. At this point, I’m thinking the subsequent fees will be as a percentage of the initial fee, say 50% to 80% with some inflation factor built in. So if I charged a client $4,000 for the initial plan and his renewal fee was 60% of this, then the second-year fee would be $2,400.
How are you charging for financial planning?
Asset Management
As an RIA only, I have no relationship with a broker/dealer. Therefore, I charge a fee based on the percent of assets in the relationship. I plan to update my ADV-II because I intend to have two fee schedules: one for financial planning clients, at a reduced rate, and another for clients of which I only manage their assets. Also, like many of you I have a tiered schedule with a maximum 1% fee. Nothing unusual here except perhaps this. Let’s say I charge 1% from $500,000 to $1,000,000, and 0.75% on $1,000,001 to $2,000,000. Assuming client A is a $900,000 relationship, my fee would be $9,000 per year ($900,000 X 1.0%). Assuming client B is a $1.1 million dollar relationship, my fee would be $8,250 ($1,100,000 X 0.75%). I am charging the fee on all dollars, not as a blended rate.
How did you arrive at your fee schedule and how is it structured?
As always, I appreciate your comments.
Don’t know if my post got through so I am posting again.
I think that banding the fees is a better way to go for both parties. If you charged 1% up to the first $1mill and then say .75% from $1-$1.5 mill the fee for the $1.1 mill case would be $10,750 as opposed to the $8,250. Your fee structure oddly enough creates a pay raise for you if the assets shrink, assuming that you keep the client.
I figure that my advice is of exponentially greater value to larger clients and so they should naturally pay more. For lots of reasons for both myself and my clients. Your pay schedule forces you to skew your time to the smaller clients, which seems to be a formula for contraction of the practice as opposed to growth.
Keep up the good work on the blog!
Mike, I’m still struggling with the issue of “how does one only manage investments without doing the financial planning to know if the investments actually fit the client’s true risk tolerance and suitability requirements? (both auditable items).
Second, for financial planning only clients, I’m considering charging a percentage of their overall net worth, with required minimums of NW to take them on as a client. Have you explored this? Keith Schnelle, CFP, AIF.