A considerable challenge for financial advisors providing standalone fee-for-service financial planning advice is figuring out the “right” price that is both profitable to the advisor, and attractive to consumers. Notably, this is a challenge that largely did not apply to past generations of advisors, who typically either just sold products with commissions (that were determined by product manufacturers and not chosen by the advisor anyway), or charged an AUM fee (in which there was strong convergence on the 1% price point for all advisors). As a result, fee-for-service advisors who are aiming to reach clients through a different compensation model have both an opportunity to expand service into previously unserved markets (particularly those prospective clients who cannot be reached through traditional advisor business models like commissions or AUM), but also a challenge in needing to take more responsibility for determining how to price their services in the first place.
In this guest post, Alan Moore of XY Planning Network and AdvicePay, shares his thoughts on how to profitably price a fee-for-service financial planning offering, including the options for calculating financial planning fees (e.g., flat fee, hourly, project-based, percentage of net worth and income), the structure of paying advice fees (e.g., one-time fees, ongoing fees, or a combination), setting the right advice fee frequency (e.g., monthly, quarterly, semi-annual, annual), how to integrate some combination of fee-for-service and AUM fees (for firms that are looking to transition from an existing AUM model), how to make sure your fees are both profitable for the advisor and reasonable for your (niche) clientele!
Ultimately, though, the key point is to acknowledge that like the massive shift from commissions to AUM over the past few decades – which allowed advisors to serve clients in a fundamentally different way and reduced certain conflicts of interest – the opportunity to provide fee-for-service financial planning allows advisors to continue to evolve their business models, profitably serving an ever-increasing range of clients with fewer conflicts of interest. Yet the freedom and flexibility of the fee-for-service model does present new challenges in setting an advisory firm’s fees in the first place… even as advisors with a fee-for-service financial planning model are poised for success in serving the next generation of clients (who are eager to receive real financial advice, but want to pay for it directly!)!