Using a Fee Calculator to Determine your Financial Planning Fees

Executive Summary

This whitepaper explores the various aspects of charging fees for providing financial planning advice. It aims to provide an understanding of fee structures, their advantages and disadvantages, and best practices for financial professionals. As individuals increasingly seek expert guidance to manage their financial lives, understanding the dynamics of how to provide that guidance while staying profitable is critical for the modern financial advisor. Having a consistent fee model is one way to meet this challenge and implementing a fee calculator is paramount to that consistency.

Introduction

Financial planning is a vital component of individual and family well-being. As clients increasingly recognize the value of professional financial advice, it is essential to understand how financial advisors are compensated for their services. The method of compensation can significantly impact the quality of advice received and the trust established between advisors and clients. There is seemingly more and more demand for planners and advisors who don’t earn income through up-front commissions, but instead are compensated on a fee-based or fee-only method.

Clients are willing to pay a separate fee AND are more engaged in the process when they pay a planning fee

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There is evidence that clients and prospective clients are willing to pay a fee to receive financial guidance. With an increased demand for comprehensive financial guidance along with a willingness to pay for that advice, advisors are under pressure to have a solution in this space. As financial planners, the challenge is to find a cost structure and methodology that is scalable, consistent, and clear.

Finally, as financial advisors, tracking and monitoring financial planning fees can be challenging especially when it comes to clients who are needing a plan update or renewal – do you charge the same as the initial plan? Do I follow the same process for the plan update?

Developing a Fee or Cost Calculator is a solution that allows for consistency & profitability in your financial planning practice.

Advantages of charging fees for financial planning

Transparency: Advisors who charge a fee are often considered more transparent because their compensation comes directly from the client, reducing potential conflicts of interest that could arise from commissions.

Objectivity: Advisors who charge fees are more likely to provide objective advice since they are not financially motivated to recommend specific products.

Engagement: When clients are paying a fee for a service, they are typically more involved to ensure they receive the value from this service.

Profitability & Diversified Revenue Stream: Charging appropriately for your financial planning work can ensure the time committed to this service is not a loss leader in hopes to collect assets. It can also help to reduce the revenue fluctuations that come from an AUM only revenue model when going through bear markets.

Increased prospective client pool: By charging for financial planning, you can now find profitable relationships with individuals and/or families that don’t meet your asset minimums.

Challenges when charging fees for financial planning

Perceived Cost: Clients may perceive fee-only services as expensive upfront, even though they may be more cost-effective in the long run.

Fee Complexity: Understanding the various fee structures and pricing models can be confusing for clients, leading to potential misunderstandings.

Consistency: how do you determine how much to charge from client to client? Does everyone get assessed the same fee regardless of their financial circumstances?

Implementing a cost calculator to determine a client’s fee can overcome all of these challenges.

Developing a Cost Calculator

Using a calculator can help overcome some of those inherent challenges that come with charging a fee for financial planning services.

Step 1: Advisors should clearly identify their services in the financial planning scope along with the cost of those services.

You can assign a cost to any service using a calculation:
Cost of a service = (Your hourly rate) x (# of hours to complete target task) x (target profit margin)

Example: retirement income projection
Hourly rate = $300 | 2 hours to complete calculation | 25% target profit

Retirement Income Projection Fee = 300 x 2 x 1.25 = $750

Step 2: Identify the type of calculator you wish to implement – examples of subject-based and package-based are shown here

Subject Based

Allows for ultimate customization

Package Based

Allows for slightly less customization but simplicity and consistency

Step 3: Develop deliverables and processes around each level of service and or subject to clearly illustrate the value.

Step 4: Begin using the calculator with new clients and then slowly introduce the new model to your existing client during annual reviews

Step 5: Track your fees and don’t be afraid to evolve your process when necessary

Conclusion

Charging fees for providing financial planning advice is a complex but essential aspect of the financial services industry. Clients must be aware of the various fee structures, their advantages, and disadvantages, while advisors must uphold ethical standards, prioritizing their clients’ best interests. Whether you already charge for financial planning or are searching for ways to begin doing so, utilizing a cost calculator is a valuable tool to elevate your practice.