Justifying charging 1% fee
Question for all you fee only planners out there, In the last couple of years the wind has been blowing in favor of fee only planning vs commision as being morally superior,
So if you are an ADVISOR vs BROKER how do you justify charging 1% or even more commision of AUM, I can understand you deserve to be compensated for your work & expertise, however you should charge for WORK by the hour why are you different than any other professionals accountants etc, that charge by the hour no matter how wealthy the client, Why would you charge somone worth ten mil, 100 grand a yr vs net worth 500000, only 5000 a yr if theorticaly you could be doing the same amount of hours work.Advisors and Brokers don't charge commissions.
Should a stupid advisor who works slowly get paid more than a competent advisor who works quickly? Shouldn't an advisor charge whatever he wants to charge and a client pay only what he wants to pay? An advisor doesn't have to charge less than 1%. A client doesn't have to pay more than 1%. Let the market decide on price.I am sure this will spark a lot of debate but. When i leave my accountants office I am done until next year(and my accountant charges me a flat fee(not unlike an % AUM… however it’s based on how complicated my return is compared to others).
Advisors have to watch an account consistently for ever(or as long as they are clients) Now I don’t count someone wrapping funds and calling themselves an advisor. Also most people have a decreasing fee as the accounts approach higher amounts.
“Planners” who charge an hourly fee, then take no responsibility for the outcome is stupid.
I don’t believe that fee vs commission is a moral issue. I think it is choice for client and advisors as long as they disclose everything.
hey squash of course you should overlook the investments but charge an hourly fee for the amount of hours you put in
If I charge $200/hour and I spend an hour doing research into XYZ Mutual Fund, do I charge all of my clients $200?
Why does the fee have to be justified? However, speaking of justification, shouldn't I get paid more for helping a client turn $1,000,000 into $1,100,000 than if I help to turn $10 into $11?does an accountant doing research on tax law or any other professional spending time on improving their service and knowledge charge all there clients? NO
They would if they could.
I've never met an accountant who only charges a flat hourly fee. The more complexity involved, the more that they charge. This is true even if it doesn't necessarily involve more time. Hourly simply doesn't work in investment management because as you pointed out in your response, there is no way to bill for the actual work involved. The time involved per client can be miniscule, but the total hours are not. Like most business owners, we try to structure our fees/commissions in the way that is the most profitable. This is no different than attorneys and cpas.http://forums.registeredrep.com/forum_posts.asp?TID=9043&KW=
Its obvious from this thread that you don't know a whole lot about the industry, as you're brand new. If you're managing a client who has $1,000,000 with you and you get him 9% return, he has made $90,000 this year. If he's managing it himself and gets 5%, he's made $50,000. Is it fair to say that if you use your expertise to earn a client an extra $40,000, would it be worth being charged $10,000? Take it another route: A person listened to a few co-workers who told him that he should open a Vanguard account and buy a few index funds and he'll be "well diversified" and have low fees. He put $1,000,000 in the following allocation: 50% - S&P Index fund, 20% - International Index, 20% - Small Cap Index and 10% - Windsor II. He asked his co-worker if he should buy any bonds. The co-worker said "Nah, you're only 37 years old. You have plenty of time until retirement, you can afford to take risk now." He did this in September of 2007. His $1,000,000 went to $620,000 last year. Do you think he would have minded paying 1% to have a professional allocate him properly and lose 18-20% last year, or would he have preferred to keep his fees low and lose 18% more than he had to?There are studies on the habits of buyers. Only 5% shop on price. If you want to be successful, don’t market to that 5%.
Your previous post says all we need to know. you couldn’t charge fees until a while ago. You want to get the CFP(not a complete waste of time, but since you don’t have any clients, might want to focus on that first). Lastly you said you had a background in insurance sales, there is an industry that lacks full disclosure. Nothing like getting paid on a policy and never having to disclose to the client what it is.
If we charged hourly fees no one would use us and instead go to vanguard because that would be there only choice. 3rdyr and Anon are right. Let the market decide what they want to pay. I charge a certain fee if you are unwilling(or unable) to pay that then you will have to find someone else or do it yourself. My clients feel it’s worth the % of their assets to have me take care of their money. 3rdyr put it best… the cost is not in how much you pay or get charged but the difference it makes.
What do you feel is fair? All your comments have been attacks. If you were to get a client how would you feel that they compensate you?
Ambitious, is this a “devil’s advocate” type post or have you already made your mind up about this subject?
What makes charging an hourly fee "morally superior"? I would really like an answer to this. As I always say, "Mode of compensation is simply a business decision." A big issue is that if a planner doesn't make enough money, he won't be able to help his clients. A planner charging a flat hourly fee can't make enough money to survive in this business. Take a close look. The vast majority of planners who use this method either work part time or have a spouse that supports them. Do you know any exceptions to this? I don't. What's a fair rate for you to charge? How many billable hours will you have to have to make the money that you want using this method? Is it realistic? Even if it is, does it make sense for you and your family to use this method of compensation if it means that you will make less money? Ambitious, humor us and go through the above little excercise. I'm curious to see if it is even a realistic possibility for you.[quote=ambitious]
Why would you charge somone worth ten mil, 100 grand a yr vs net worth 500000, only 5000 a yr if theorticaly you could be doing the same amount of hours work.[/quote]Something no one has touched on, but this comment is just blatantly wrong. I spend a lot more time and effort on my A+ clients with 1mil+ than I do with my clients that have 100,000 with me. It’s not the same amount of work.
eman07, isn’t that an argument in favor of hourly billing? If you spend more time with your big clients, you will make more money from your big clients.
I forget who said it, but I personally agree that the client is getting more than 1% worth of us when they lose less than they would have in a down market. And you can’t fall back on the “mutual funds never beat the market, so don’t pay a fee” crap. Most people can’t/won’t allocate properly, so they end up blowing themselves up. Let’s say you have a retiree with $1mm in his nest egg, and instead of him losing 35% last year (and I heard of a lot of people like this losing 65-70% during the dot-com bust), he only lost 15% or 20%. You just saved him $200-250,000.
Those are numbers you can't promise, but that's the kind of stuff you save people from - stupid mistakes. I truly believe we are here to protect people's assets and help them achieve a reasonable rate of return commensurate with their goals and objectives, not "beat the market". That's where Money Mag, et al, do individual investors a great disservice - convincing them that by just "doing it yourself", you will simply achieve market returns. Well waht if "market returns" are not your goal? Then what do you do? What if you just want your money to grow faster than inflation, without losing money, and with less volatility than the market? Does Money Mag help you do that? Will a $200 financial plan do that?[quote=anonymous]eman07, isn’t that an argument in favor of hourly billing? If you spend more time with your big clients, you will make more money from your big clients.[/quote]
No, it’s not.
I was just saying that he was arguing that you are charging your high AUM clients so much more than you’re lower AUM clients, for the same product. I’m just saying, that’s not the case.
Most CPA’s I know do not charge by the hour, they charge based on complexity, often based on which tax return schedules are needed, # of inputs (i.e. income sources) if it involves a business return, etc. And most have a minimum (most that I know are at $500 minimums - even for simple 1040’s). So you have a small firm doing 1500 returns, you’re looking at a few million in revenue. And you probably employ a few CPA’s (or EA’s) and some preparers/checkers during tax season. Throw in a little audit work, some bookkeeping and payroll services, some tax “advising” during the year, and each partner nets a few hundred thousand a year. Not a bad gig.
[quote=B24]I forget who said it, but I personally agree that the client is getting more than 1% worth of us when they lose less than they would have in a down market. And you can’t fall back on the “mutual funds never beat the market, so don’t pay a fee” crap. Most people can’t/won’t allocate properly, so they end up blowing themselves up. Let’s say you have a retiree with $1mm in his nest egg, and instead of him losing 35% last year (and I heard of a lot of people like this losing 65-70% during the dot-com bust), he only lost 15% or 20%. You just saved him $200-250,000.
Those are numbers you can't promise, but that's the kind of stuff you save people from - stupid mistakes. I truly believe we are here to protect people's assets and help them achieve a reasonable rate of return commensurate with their goals and objectives, not "beat the market". That's where Money Mag, et al, do individual investors a great disservice - convincing them that by just "doing it yourself", you will simply achieve market returns. Well waht if "market returns" are not your goal? Then what do you do? What if you just want your money to grow faster than inflation, without losing money, and with less volatility than the market? Does Money Mag help you do that? Will a $200 financial plan do that? [/quote] Boo-yah.Some people offer breakpoints on the AUM percentage fee. For example, I would never charge someone with $100k only 1%.
Actually, I do know what I’m talking about. First off, I said a few CPA’s, as in maybe 3 or so. Add to that some preparers and checkers, and there you go. I have a friend who is an EA. She bangs out 800 with no other registered (CPA or EA) people in her office. She has 3 preparers and 3 checkers. She’s not doing most of the heavy lifting herself. I know a 3-man office that does about 500 (one CPA, two preparers).
Don't know whether it's the norm or the exception, I just know it's being done.thanks guys for all your answers its an interesting debate, Uderstand I am not criticizing anyone just trying to understand and learn, I am new to this and in the process of structuring my compensation schedule and want to do the right thing, BTW the reason hourly billing can be looked as morally superior, is that it TOTALLY takes away the conflict of interest, same argument fee only planning make against commisions that there is a conflict of interest to recomend products that make the broker more commision, Can be argued against fee, There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else
You are extremely naive. With hourly billing, you need to find a way to make every hour that you work a billable hour or you lose revenue. That's a huge conflict. If you practice isn't busting out at the seems, you need to work more slowly or you lose revenue. That's a huge conflict. Hourly fees can mean that smaller clients get a much smaller benefit per dollar. That's a huge conflict. All modes of compensation have conflicts. The only good way to minimize conflicts is for the advisor to be fiancially secure. In this manner, it never matters what a specific client does or does not do. Before you take another step down the path of hourly billing, determine if it is even possible to support your family in this manner. I think that the odds will be very stacked against you.thanks guys for all your answers its an interesting debate, Uderstand I am not criticizing anyone just trying to understand and learn, I am new to this and in the process of structuring my compensation schedule and want to do the right thing, BTW the reason hourly billing can be looked as morally superior, is that it TOTALLY takes away the conflict of interest, same argument fee only planning make against commisions that there is a conflict of interest to recomend products that make the broker more commision, Can be argued against fee, There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else
thanks guys for all your answers its an interesting debate, Uderstand I am not criticizing anyone just trying to understand and learn, I am new to this and in the process of structuring my compensation schedule and want to do the right thing, BTW the reason hourly billing can be looked as morally superior, is that it TOTALLY takes away the conflict of interest, same argument fee only planning make against commisions that there is a conflict of interest to recomend products that make the broker more commision, Can be argued against fee, There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else
Conflict for an hourly biller - take your time and you can rack up some money. For instance, in cases where I do hourly billing (usually for planning services or unique financial situations), I bill in six minute increments. Every email is 12 minutes. Every phone call is at least six minutes. And so on and so forth. I have a billing sheet that sits on my desk for just those calls. Send a lot of emails needing clarification - could be a conflict. Why didn't I just write it down on one? Make a phone call - there's some too. Your case will probably take me about ten hours to complete. But I finished in seven, do I give the rest of the retainer back, or do I simply try to find other ways to "tweak" the plan.
No one case is morally superior to the other. You can make an argument for any form of compensation. I thought this as well. I try to eliminate as many conflicts as possible, but there will always be some.
Damn anon - you beat me too it.
thanks guys for all your answers its an interesting debate, Uderstand I am not criticizing anyone just trying to understand and learn, I am new to this and in the process of structuring my compensation schedule and want to do the right thing, BTW the reason hourly billing can be looked as morally superior, is that it TOTALLY takes away the conflict of interest, same argument fee only planning make against commisions that there is a conflict of interest to recomend products that make the broker more commision, Can be argued against fee, There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else
Where else? I can hold almost anything in a fee account... Also the hourly doesn't eliminate anything, because you will need to set future appoints to generate the income(and you don't know how the portfolio is doing because you aren't monitoring each individual portfolio is you are an hourly planner)
Wouldn't the interest be in both parties favor? You'd have more of an interest to make the client more money because that 1% will be more if the client grows 15% as opposed to 5%. Ya dig? Plus you wouldn't have to deal with the moaning and groaning of the client when you tell them you have to bill them for the phone call asking if they can send you a statement so you can review the account they have at E-Trade that you are "advising" them on.There is a interest to get client to invest with you to earn the 1% when maybe client would be better off leaving his money somewhere else
[quote=BioFreeze] [quote=B24]Actually, I do know what I’m talking about. First off, I said a few CPA’s, as in maybe 3 or so. Add to that some preparers and checkers, and there you go. I have a friend who is an EA. She bangs out 800 with no other registered (CPA or EA) people in her office. She has 3 preparers and 3 checkers. She’s not doing most of the heavy lifting herself. I know a 3-man office that does about 500 (one CPA, two preparers).
Don't know whether it's the norm or the exception, I just know it's being done.[/quote]It's the exception. The only people who can accomplish this are people that are known only to you.
[/quote] I guess that makes me special
I can’t justify a 1% fee. That’s why I charge three.
Nobody ever complained when they meet or exceed the markets returns. They get antsy when the market is down, and the fees are glaring at them. Someone mentioned earlier that we save them from themselves…market down 40% they are dow 18% or something to that effect. I use that often when I get the occasional whiner. I have even pulled up an old morningstar to show the results the way they did it, if left how it was when they came to me. I then never hear the questions again.
On a side note, Oblama may force us all with his heavy hand to raise fees and begin to price folks out of the market. More inept congressional regulation might get dirty and nail thinning profit margins. I never got hired by a poor person.Most of my clients are under 1% fee.
Anything under $100,000 is 1% my max fee. I just do not have the over head to have to charge anything higher. I make a nice profit at 1% since I am indy.[quote=Greenbacks]Most of my clients are under 1% fee.
Anything under $100,000 is 1% my max fee. I just do not have the over head to have to charge anything higher. I make a nice profit at 1% since I am indy. [/quote] How much do ticket charges cost you per buy and sell? Ours are $15 per buy and $15 per sell, so if we have a $100,000 account with 8 funds/stocks and we do 5 buys and 5 sells over the course of a year, theres $150 down the drain and 15% of the 1% fee, not to mention the 15% off the top with having only an 85% payout.3rd. Do you eat the ticket charges?
Yea we pay for the ticket charges. The only thing we don't pay the charges for is in SMA's of course, and the Ameriprise version of Jones's Advisory Solutions.
[quote=ambitious]Question for all you fee only planners out there, In the last couple of years the wind has been blowing in favor of fee only planning vs commision as being morally superior,
So if you are an ADVISOR vs BROKER how do you justify charging 1% or even more commision of AUM, I can understand you deserve to be compensated for your work & expertise, however you should charge for WORK by the hour why are you different than any other professionals accountants etc, that charge by the hour no matter how wealthy the client, Why would you charge somone worth ten mil, 100 grand a yr vs net worth 500000, only 5000 a yr if theorticaly you could be doing the same amount of hours work.[/quote]People have already said it but I'll say it again. More money means more hand holding and higher maintenance, thus more payment to the Advisor. I can't stand the whole "fee-only" garbage and hourly planning crap. On a side note, just saw an article in FA mag that one of the former president's of NAPFA got caught with stealing client assets. Way to go with the ethics!
[quote=3rdyrp2]
Yea we pay for the ticket charges. The only thing we don’t pay the charges for is in SMA’s of course, and the Ameriprise version of Jones’ Advisory Solutions.
[/quote]I believe AMP lets you implement block trading to reduce ticket charges once you meet the requirements for PWA. We are close to qualifying so I can’t say for sure.We’re 9 $1 million client’s away from PWA status, with about 3 attainable in the next 6-12 months, so we’ve got a ways to go.
[quote=B24]I forget who said it, but I personally agree that the client is getting more than 1% worth of us when they lose less than they would have in a down market. And you can’t fall back on the “mutual funds never beat the market, so don’t pay a fee” crap. Most people can’t/won’t allocate properly, so they end up blowing themselves up. Let’s say you have a retiree with $1mm in his nest egg, and instead of him losing 35% last year (and I heard of a lot of people like this losing 65-70% during the dot-com bust), he only lost 15% or 20%. You just saved him $200-250,000.
I agree with your comments and would add that by saving my clients 15-20% last year, we have beat the market and will do so going forward on an annualized basis.
Before I became an advisor I was in trading and the primary thing I learned there was risk management; if you don’t preserve your capital, you can’t trade another day.
The same goes for our clients; if we manage their money by focusing on the downside risk first and outperform in down market years, then the long run our annualized results will beat the markets—convincingly.
Everyone thinks of ‘beating the market’ in terms of achieving higher gains in the good years; however, preserving capital/limiting losses has a much, much greater long term impact than outsize gains.
My point exactly! Client should have a choice between fee and brokerage which a “fee only” planner can’t give them.
Says who? A "fee only" planner can charge in a number of ways. Mr. Client, do you want to pay for every trade we make? Ok, well here is the "fee" for that. Mr. Client, do you want to just pay me a flat fee every year no matter what your assets do? Ok, here is the fee. Mr. Client, do you want to pay me a percentage of assets under management fee, so that as you make more money, I make more money, and if you lose money, so do I? Ok, here is what we charge for that.
There's always a choice. It's all about how you structure your ADV as a "fee only planner".
There are conflicts everywhere, but a "fee only" planner has a lot more flexibility than you think.
[quote=AGEMAN]A big hole that I see in the fee only approach is that some assets should not be charged a fee. For instance a client has a stock he knows he never wants to sell so why pay a fee only planner a fee to hold this stock. I like to freedom to be able to offer both fee and brokerage choices to clients and place the appropriate assets where they serve the clients best interests. [/quote]
It’s very simple. We separate that stock out as an unsupervised asset. The client doesn’t pay for it, and we don’t look at it.
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