Pricing Models for New Practitioner

[ros]

Hello,

I graduated from the MBA-FP program in May 2009. Since then, I have been helping three clients - all either family or close friends - with comprehensive plans on a pro bono basis, both to get the practice under my belt and to help me work out my preferred planning process (I'm following a version of Kinder's life planning model).

Now one of those pro bono clients is referring me to her brother and sister-in-law, who will not be pro bono clients. My question is: what would be a pricing model I can implement, given my level of experience (which is not much)? My thought is to offer either an hourly rate (which should be...?) or a retainer based on client's net worth.

As an aside, I have a full-time job (not as a planner but in a related field), so all of my planning work is, for now, "on the side" - no AUM, no commissions, fee only.

Any insights would be appreciated!

Thanks,

Juan Ros (MBA '09)

[piannacc]

Hi Juan,

I’m in a similar situation so I don’t have a final answer, but I can give you some thoughts.

First you need to decide if you are going to be a “fee-only” advisor or not. Clearly the FPA and CFP Board are moving in that direction and NAPFA is so exclusively, however it’s still a choice you have to make. If you are planning to make commissions on products, etc. then you might only charge a nominal fee for the plan since your real payment comes from commission.

If you plan to be fee-only then compensation is usually done in one of the following ways.

Flat fee: This approach is probably the simplest as you establish a fee based on the complexity of the plan. I’ve heard of fees ranging from a low of $500 to well over $5,000 for really complex/high-net-worth individuals. Pricing is usually based on the complexity of the client’s financials. I suppose you could price the plan based on a percentage of the clients total assets, but that seems a bit odd and you could have a very high-net-worth client needing a very simple plan. The downside to this pricing approach is once the plan is delivered and paid for, your contract ends (unless you renegotiate).

Retainer Fees: This is usually a negotiated, fixed-quarterly fee that might range from a low of $250 ($1,000/year) to well over $1,000/quarter. The potential downside of this approach is you are likely to do more work up front on the plan than you are getting paid for. However, this should be offset by the advantage which is the fee continues once the plan is developed as a way to pay you for implementation and monitoring. I suppose you could also build in a minimum commitment such as a one year commitment as a way to protect yourself from a client engaging you and dumping you the minute they get their plan.

Hourly: This is another simple approach, but might be tough for those of us who are new and can’t easily anticipate the time needed to produce a plan. You obviously need to price yourself appropriately, but if it ends up taking you 30 hours to create a plan and you told the client you bill at $200/hour you better make sure they expect a $5,000+ bill! Of course, you don’t have to bill for every hour. With hourly billing I’ve heard of everything from $150 to over $400/hour and I’m sure there are those charging more or less. With plans I think this only works if you can pretty much guarantee the number of hours you plan to bill and if so, you might as well make it a flat fee. However, if a client needs you to do extensive research or help with various project, an hourly fee is probably ideal.

Assets under management: The final common approach I know about is charging a percentage of assets under management. Such practitioners often provide the financial plan at minimal cost or even include it under as one part of the deliverables. However, this really doesn’t make sense until you are handling a clients investments directly.

Regards,

Paul Iannaccone, MBA, CFRE, candidate for CFP Board’s certification
Charitable Funding Advisers

[ros]

Thanks, Paul. That's what I figured. I can appreciate the approach Diliberto uses - a retainer that is based on a client's net worth. But I think starting out, a flat fee is probably more sensible, particularly since in the foreseeable future I will be doing planning on the side.

Looking forward to seeing you Sunday at FPA!

Juan

[rwlarson]

Juan, Paul's input mirrors what my learning indicates are trends in FP for billing. It is imagineable to consider that a client earlier in your FP career will take longer to process and write the plan than for one a year or two later. Perhaps you should have a reduced billing price for the first clients with an expectation that it will be the long term billing strategy/process as you gain efficiencies in your practice. One other variation on Paul's input is to set the retainer based upon AUM level rather than hours worked as the retainer works in the down market and AUM in the up market. Such a strategy would allow you to increase your retainer as an client improves his/her lot in life and AUM increase. Wallace