This article was originally published in Rethinking65
I started my career as a fee-only financial advisor because I always believed in this model. I really wanted to be paid for my advice like an attorney and I never wanted to simply give away this advice or sell products. It never made sense to me.
The president of a very large broker-dealer once told me that I was ahead of my time for thinking this way. I disagreed. I just wanted to be paid hourly, or a flat fee for a financial plan, or a retainer fee or a percentage of AUM — or some combination of the above.
Consultative selling is much harder that commission selling but much more rewarding to me. This view hasn’t always been well received by potential clients — until I explain it to them.
Productive introductions
When I first started in the business, I competed with male brokers who told clients everything was free. Instead, I told my clients, “Here is my pre-meeting paperwork (homework). You have to complete this and then I do a comprehensive financial plan that I charge a flat fee for.”
The initial meeting is always complimentary. I decide if I want to work with them and if they are a fit. I send them the quote and price after the meeting but give them a range during the meeting. I tell them I will scope the fees after we meet, and I see what their net worth and/or income is.
I always felt, “How can I give advice without knowing everything?” It is almost like going to a doctor and only telling them part of the story. It should be a full disclosure relationship.
So many men I have worked with over the years clashed with me on this. They said you should be doing it for free and I said, “No, I am not giving away my advice and financial plan on a hope and a prayer the clients will want to work with me.”
Next steps
Once I start working with clients, I charge everyone a flat fee in Year 1. My first-year fee, which includes my comprehensive financial plan and one year of advice, runs between $2,500 and $10,000. I calculate it on a scale based on income and/or assets. Most of the time, potential clients fall within the same band. I use my judgement or split the difference.
For example, if a younger client is earning a high salary, they may be in the $4,000 band for income but in the $2,500 band for net worth. Accordingly, I would charge $3,250. Or for a retired individual with a lower income (that might put them in my $3,000 range) and a higher net worth (says, closer to my $6,000 fee), I would charge $4,500.
I always spent a large amount of time in Year 1 with a new client. It’s a very labor-intensive time that includes multiple meetings and lots of background work to analyze current investments, insurance coverage, 401(k) plans, various documents, etc. If I charged by the hour, I might even lose money on this client, but it’s worth it to me to get to know their situation.
Nothing valuable is free
When some clients replied, “I am getting it free from XYZ broker,” I would say, “If you believe the advice you are getting for free is more valuable than my conflict-free advice, then take it.” Nothing valuable is free. I also asked them to bring me the other broker’ recommendations so I could review them. In most cases, these recommendations were for loaded mutual funds.
Most people don’t read prospectuses or even know where to look, so I found myself educating clients about this “free advice” they’d received elsewhere.
For example, I let them know that with these funds other brokers recommended, they’d be paying a 5% front-load fee, a 1.5% ongoing management fee, and sometimes also get charged on the way out. All of this was not easy to see on the statements.
I highlight these fees in the prospectus and give it to my potential clients or clients. They’d respond that the other brokers never told them this and I would say, ‘They don’t have to. All they have to do is give this to you or send it in the mail.”
Selecting the right fee model
Earlier, I mentioned that I’m interested in an assortment of payment models. After Year 1 of working with a client, we decide which model — retainer, AUM or a combination — works best.
Here’s a look at the pros and cons of each. As a female advocate, I also believe full disclosure of fees is better for all but especially for women. In my opinion the fiduciary model work so well for women because it lets them know the advisor is working in their best interest.
I never want any women to be taken advantage of or be so trusting that they are overcharged or put in products or investments they don’t understand.
Additional Reading: Why Women Leave Their Advisors
Retainer fees
Most clients under retainer (a flat annual fee) do not have assets for me to manage directly but want advice on everything. They often have most of their assets invested in their business, 401(k) or other work retirement plan, family limited partnerships and/or real estate. These clients usually have higher net worth and complex situations.
My flat fee includes ongoing financial planning as well as advice on assets I am not directly responsible for, such as 401(k) accounts and business assets
Sometimes I adjust my annual fee downward for a client after the first year because so much work is handled in Year 1.
Pros: We can give advice on all of it and charge a flat fee.
Cons: None to the client.
AUM fees
These are for clients who decide they just want asset management services. They pay us to directly manage their assets under management. We are responsible for trading, performance reports, and picking and managing the managers.
Pros: We are on the same side of the table as the client. If their assets grow, so does our fee.
Cons: When the market falls like it did in 2022, our revenue goes down and is tied to the market no matter how good our recommendations are.
Combined-financial planning plus asset management fees
This is for clients for whom we do a bit of everything. We provide them with an ongoing financial plan, give and update advice every year, and take direct responsibility for their investments. As with clients who select the AUM-only model, we monitor and report on their performance, trade, pick and monitor their investments, and make sure their asset allocation is correct.
Pros: We get to help on both fronts and it matters. The price is usually lower for clients who use both services. We get to make the most impact here. For example, one client wasn’t paying us for advice, just portfolio management. They were very happy with the return and started overspending. The next thing we knew, the client filed for bankruptcy. They said, “If you were telling us what to do and how much to spend and holding us accountable, this never would have happened.”
Cons: It will cost a little more because it is worth it!
Thoughts on hourly fees
I very rarely charge hourly fees because I think the flat fee is more effective. If I charged clients for the amount of time that it takes to get to know them intimately during that first year, most people would not want to pay it. If people only want to pay for advice on an hourly basis, I refer them to the Garret Financial Network, which charges hourly fees. Some of my friends are advisors on that network.
We keep track of what our clients pay us by using our portfolio accounting software and old-fashioned spreadsheets. Once a year, we send out hard-copy invoices for retainer fees and follow up on them.
My favorite saying from my grandmother was, “Don’t be pennywise and pound foolish.” My other favorite from my dad was, “You only cry once when you buy quality.” The message advisors need to convey to clients is this: Using the right advisor with the right pricing model will make you rich, keep you rich, or make you richer!
Cary Carbonaro, CFP, MBA, is SVP, director of Women & Wealth at ACM Wealth, the wealth planning team of Advisors Capital Management. She was appointed and has served as a CFP Board ambassador since 2014. Cary is the author of “The Money Queen’s Guide: For Women Who Want Build Wealth and Banish Fear.” She has spoken all over the world about financial literacy for women. You can reach her at [email protected].
