For most of its history, financial planning was compensated through commissions paid on the products that were implemented, or the portfolio that was managed on an ongoing basis, after the initial plan was presented. While unfortunately this framework for financial planning created some conflicts of interest, and limited its reach (to only those who needed a portfolio to be managed or a product to be purchased), it made the pricing of financial planning services rather simple – because the pricing was tied to the existing compensation of existing business models (commissions or AUM).
However, with the ongoing rise of financial planning as a standalone service, so too comes the opportunity to charge standalone financial planning fees, entirely separate from the need to implement financial services products or portfolio management. The good news of this flexibility is that it opens up new segments of consumers to receive financial planning. The bad news is that there’s virtually no existing framework for financial advisors to determine how much they should charge in a world where they can potentially try to charge “anything” they want.
Of course, in the end a financial planning business is only viable if it correctly offers a service that consumers value, can afford, and that can be delivered profitably given its costs. Yet in the context of financial planning fees, each of those mechanisms – the cost (in terms of time) to deliver the service, its affordability for clients, and its perceive value – are each mechanisms that can be used to set a price on financial planning.
For instance, some financial planners might set their pricing based on the cost of their time; financial planning services that take 10 hours per year to deliver, where the financial advisor cost of time is $150/hour, would be a $1,500/year (or $125/month) service. Alternatively, clients might pay based on what they can “afford” to pay, such as a retainer pricing formula based on 1% of income, or 0.5% of net worth (or 1% of investable assets). Or financial planners can price their services based on the perceived value to the client; after all, if high-income clients value their time at $1,000/hour, then they may be willing to pay anything up to that hourly rate, regardless of the cost of the financial planner’s time directly, because that’s what it is worth to the client.
Of course, in the end, setting a proper pricing structure for financial planning services also requires identifying a clear target clientele who will receive the service, to ensure the proper fit of relevant services, with a high perceived value, an affordable cost, that the financial advisor can deliver profitably. Still, even once a target clientele has been identified, the cost of a financial advisor’s time, the value of the financial planning services, and the client’s ability to afford them, are all relevant mechanisms for setting a proper price on financial planning.
