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As planners continue to seek ways to make their businesses more stable, successful, and profitable, it has become increasingly popular lately to talk about including separate fees for financial planning services, often in the form of a retainer. As the general view goes, doing so allows you to stabilize your income with a steady retainer base, and simultaneously helps you to better reinforce the value of your financial planning by setting a clear price tag on it. There's just one problem: When you look at business models outside of our industry, we see the reality is that setting a separate price tag on standalone services does NOT help consumers value and appreciate the service more. In fact, it helps them to minimize use of the service, and absorb the cost only reluctantly (and sometimes even resentfully) when absolutely necessary. So does that mean by charging separately for financial planning, we're proactively DISCOURAGING clients from utilizing our financial planning services and encouraging them to think more investment-only!?

The inspiration for today's blog post comes from a series of blog posts that Bob Clark has written recently on AdvisorOne. The first asks whether it is time to switch from asset-based to flat fees, followed by a second post suggesting a hybrid fees-plus-retainers model, and a third exploring the 'right way' to charge an AUM fee plus a retainer. In fact, the theme is similar to one I've written on in the past, noting how many planners seem to discuss switching from asset-based fees to retainers every time there's a major market event, effectively bailing out of the markets and converting their practice from a stock to a bond, even while telling their clients to stay put, when in reality there are alternative methods to deal with the impact of market volatility on a firm's profit margins.

But the focus of today's discussion is specifically on the concept frequently put forth that charging separately for planning is a good idea because it helps clients to VALUE the service. As the saying goes, "if all you charge is asset-based fees, clients will only think of you as an asset manager." (A view I have strongly questioned in the past.) The prescription, instead, is to charge separately for planning, thereby ensuring that clients "properly value" the planning by seeing (and writing a check for) the price tag associated with it.

The challenge is that when I look at other industries, I'm hard pressed to find any example where charging a fee outside of the core service makes customers value the separate service more. When airlines added a separate charge to check bags, the response was not an acknowledgement of the value that the airline provides in offering to fly our bags to our destination; it was an outcry against the airlines, and a decrease in the number of people who check bags. The health insurance industry has long since figured this out as well: if you want to decrease the utilization of a service, just put a higher cost on it (in the form of a deductible or co-pay). Writing a huge check to an out-of-network specialist doesn't make me value the specialist more; it just makes me have greater resentment that I have to write a separate check on top of all the services my insurance already covers.

And what if some of the service providers we already write checks to on a regular basis charged us more for some of the "premium" services they currently include? If the phone company said "You know, consumers just don't appreciate all the time and effort we put into erecting new cell towers and maintaining phone lines in their area and fixing them after a storm; we should add a separate $50 repair fee to every local household when we fix lines in their area" - does anyone think the consumer response after a damaging storm and a $50 invoice would be "Oh, NOW I understand the full value that the phone company provides!" Of course not. We already accept that there's a certain holistic offering that the phone company provides in exchange for our monthly fee; charging us separate for each new cell tower erected and phone line repaired does not ingratiate the company, nor their service, to us; in fact, it would be quite the opposite.

The same phenomenon holds true in financial planning. By charging a separate fee for planning - especially if we are already charging an AUM fee - the natural outcome is not to increase the perceived value of financial planning services... it's to decrease the utilization of those services in the first place! If we charge a separate planning fee, then each and every year the client will ask whether he/she really needs financial planning this year. If not, the client will ask if they can just skip the planning fee and go investment-only for the year (a phenomenon virtually all of my retainer-charging friends have witnessed). If we insist the fee is necessary, now the client just feels like they're being forced to pay for services they don't want or need, and the planner creates a win-lose situation with the client.

Which means in reality, the best way to get a client to willingly experience financial planning, and perceive the value, is to not charge separately for the service! By including it at no additional cost, the client is encouraged to take advantage of the financial planning services offered... thereby getting a more enriching and fulfilling client experience, increasing the firm's client retention rate, and likely enhancing the client's referral rate. By charging separately for financial planning, the opposite occurs: the client is less likely to utilize planning - not wanting to incur a fee for a service they don't fully appreciate yet anyway, especially at first - and thereby has a weaker connection to the firm, a less favorable client experience, and not much reason to refer friends and family. In other words, by charging clients separately for planning - and encouraging them to decrease their utilization of planning services - you can actually end out with clients who are even more investment-centric, because they don't actually use your planning services enough to value you for anything else!

Of course, I realize that some firms continue to be concerned about the revenue and profit implications of not charging separately for planning. To which I respond "Are you trying to run a short-term business or a long-term one?" A comprehensive client who pays a 1% management fee on a $1,000,000 portfolio will pay the firm $100,000 of fees (plus growth) over the next decade, and a client who receives ongoing financial planning is highly likely to stay for the whole 10 years because of the valuable experience and service they receive. In fact, the client who takes advantage of a quality financial planning experience is also more likely to refer friends and family, generating exponentially more profit. So the question arises: if a single $1M client over a decade is worth $100,000 in fees, plus growth, plus referrals... who really cares whether or not the client is maximally profitable in year 1 alone? If your clients turned over every few years, then it would be important to be highly profitable in every year (of course, if you're losing your clients after a handful of years, you have other problems beyond just what you charge for planning!). But if your clients really stick around for the long run - and if you're really delivering a service worth sticking around for - then why on earth would you want to set up expensive barriers in the first year (for the sake of your short-term profitability) and sacrifice the value of a long-term client relationship before it even has the chance to begin?

So what do you think? Is charging up front for financial planning really the best way to get clients to value the service? Or is it actually the best way to discourage the clients from even using the service in the first place? Is it possible that charging separately for planning could be a good short-term business decision and a bad long-term one? Are your clients profitable enough in the long run that you don't have to derive maximum profit from them in year 1, too?

  • Dave Grant, CFP(R)


    I couldn’t disagree more. If this fee structure, and value provided by planning, is explained accurately and succinctly from the onset, there should not be this thinking. It also comes down to finding a best match of client.

    I try to explain to prospective clients that financial planning is my main job and that’s why the retainer is there, and will always be there. If you would like your assets managed, that is an additional service, hence the extra fee. I don’t do investment management without planning, and that will never change. I’m a believer in project management, so that if a client only takes 5 hours a year for planning, then their retainer should reflect that (subject to a minimum fee). If they take 55 hours, then it will be substantially higher and all efforts should be taken to explain this to the client. If they don’t understand this, then they may walk, and that’s OK. I value my time and expertise in order to be paid for it.

    There’s plenty more to be said on this topic, so I’ll let others chime in.


    • Michael Kitces

      Like you, we don’t do investment management without doing the planning first. But that still isn’t an explanation of why we need to require a client to write a SEPARATE check for it.

      If your planning is really valuable, the clients will value you for the financial planning work that you do. Not how you charge them.

      I don’t pay the doctor separately to gather a case history before prescribing me medication. I don’t pay the phone company separately every time they fix power lines in my neighborhood. And I certainly hate paying the airlines separately for each and every bag I wish to check.

      In any range of businesses, the model has always been the same: charging separately for a service is a fantastic way to DISCOURAGE use, and does nothing to make customers value the service more. In fact, it’s most likely to make customers RESENT the service, especially if it’s both a separate charge AND required.

      When we wonder why it is we can’t reach more of the population with financial planning, I can’t help but wonder if part of the reason is that we insert fees for an unproven value proposition (in the client’s mind) at the beginning of the process… and then wonder why they won’t step up and pay.

      Take yourself OUT of the planner’s seat for a moment, and put yourself in the client’s seat – or better yet, the prospect’s seat who has no clue what financial planning REALLY is, what it means, what it’s value is, and how it can help their lives. How does it possibly advance the cause with the client to tell them that they’re required to pay a significant fee for something they don’t even know they should value yet? And more importantly – how many more clients would we all have if we just DEMONSTRATED the value of planning to the client by actually doing it, rather than setting unnecessary financial barriers in front of them?

      – Michael

  • David Jacobs


    As someone who has been offering my services on retainer for years, I agree that making them separate charges is counter productive. I flip things around. I charge a retainer for financial planning services and they get the investment management portion thrown in at no additional charge. This helps put the focus on the financial planning.


    • Michael Kitces

      Fair point in the context of my post here – that keeps the services from being separated, where there is an incentive/opportunity to “opt out” of planning.

      I do worry that financial planning by retainers is also a less scalable business model over time and harder to maintain profitable as labor costs rise, but that’s a separate discussion (and future blog post) I suppose. :)

      – Michael

      • Dana Anspach

        This is a great discussion. I think it makes sense to distinguish the services, but have not as of yet figured out the “right” way to do so.

        For example, Michael, you pay a fee for an office visit to your doctor, and a separate fee for the medication. You would, hopefully be uncomfortable if the doctor prescribed medication without examining you and asking questions first, and you understand you are paying for different things.

        The problem is in our industry plenty of people charge 1 – 1.5% of assets and do no planning. How do you remain profitable charging the same rate, and yet spending far more hours servicing this same client? Those of us who practice as fee-only full-service advisors that incorporate tax planning are the minority. It takes more up front education to explain to the prospective client the difference in what we do and what others that may charge an asset based fee do.

        At the same time, as Dave pointed out, some clients have far greater planning needs than others with the same assets. Does it make sense for them to pay the same amount? It doesn’t make sense to me.

        I charge an upfront planning fee, which I have the option of waiving if the client engages us on an ongoing basis, as I too, will not take on investment management clients without doing the planning work. Then I am trying a hybrid model of a minimum flat fee plus a lower bps amount in an attempt to make the fee charged more commensurate with the planning time that client will likely take up. This is a new model for me, so we’ll see how it goes.


        • Michael Kitces

          Your medical example is good, but bear in mind the context.

          YOU don’t really pay for your doctor visit, or the medicine. Your INSURANCE pays on your behalf. You pay a flat ongoing monthly fee for your insurance. Your insurance company, on the other hand, charges you a co-pay for visiting the doctor or getting your medication – and the reasoning is quite clear. The insurance company charges co-pays specifically to discourage use – or at least, make you think seriously about whether you “need” the care/medication – because the clear trend was that when you included everything in the single bundled cost, people used it a lot!

          Except the irony is that when it’s planning… shouldn’t we WANT clients to use it a lot? So if you’re going to keep the medical analogy, that would argue for the single-bundled-fee model!

          And simply put, the firms that are doing asset management only and no planning are losing clients left and right to the firms that do offer a better experience, including the planning. NO segment of the financial services industry has the kind of retention rates an asset management PLUS financial planning firm does. It may be a slow fight, but the planning firms are winning and gaining market share as it goes.

          And this is the natural course of business competition. If you charge 1% and do no extra planning work, and I charge 1% and do full comprehensive planning, I offer a better value proposition. Your choices are to either: a) offer planning to compete; or b) lower your prices so that your cost is still a value for what you DO actually offer. These competitive forces are playing out now… again, in the favor of the firms that really do the planning.

          – Michael

        • Michael Kitces

          On a quick follow-up note – and yes, when you’re running a BUSINESS, it is true that sometimes some clients utilize services more than others.

          Is it “fair” that I pay the same rate for insurance as my neighbor, when I had only one well-visit to my doctor last year, and he saw 7 specialists for a severe medical condition? Or the same price as my other neighbor, who had two emergency hospital visits?

          Is it “fair” that I pay the same rate if I use 100 minutes of my 750 minute cell phone plan, as my neighbor who uses 749 of those 750 minutes?

          These are business realities. You pay to have certain services available to you in all of these business models. Actually needs and utilization vary from month to month and year to year. That’s just part of the deal. But as those other business models show – and ours too – it’s a deal that works. Clients are paying for it – and not leaving, which means they must be finding SOME value, regardless of what we think!? – and firms are doing it successfully.

          Managing utilization across a range of clients/customers is a challenge for many businesses in many industries. Yes, that does include ours, but that IS a MANAGEABLE business challenge!

          – Michael

  • Jessica

    We have planning and investment management as seperate items. Clients can’t get the investment management without the planning, but they CAN choose which tier of planning they want to receive. The more planning they do, the more discounted the investment management is. So, in essence, the reduction in asset management fees helps to offset the out-of-pocket cost of the planning. Our fee schedules have been very well received by clients and prospects. When they look at the cost of the planning versus the value received, they can determine if it’s worth it. When it’s all wrapped up as an AUM fee, they can’t tell (and they’ve flat out told us that).

    And for the record, many doctor’s offices are moving to a similar fee schedule for folks with high deductible health plans where insurance seldom even kicks in. If you want sick visits only and your annual check-up, then you pay a certain fee schedule. If you want holistic medicine with a weight loss program, monthly blood tests, virtual consultations, etc. then you pay a retainer plus per-visit costs (at a reduced cost per visit of course). Granted this model isn’t for everyone, but then again, neither are our services…


  • hosting

    The brokerage commission system has created a market for questionable financial advice – the reality is that the advisers of the people you trust to work for their interests and this is simply not the case.

  • Tom

    I agree with a lot of the article. Charging a retainer fee in addition to an AUM fee doesn’t seem to make a lot of sense. Show people the value you provide in giving investment advice, that it takes into account estate plans, tax plans, retirement plans, cash flow mgmnt, risk mgmnt, education plans, etc, and charge accordingly for that holistic advice.

    However, some people don’t have assets to manage. Maybe they have 50k in their employer’s 401k. Should they be excluded from receiving a comprehensive financial plan if they are willing to pay a fee for it? By comprehensive financial plan, I mean a written action plan with analysis backing up the recommendations in the following areas: risk management, education planning, cash flow mgmnt, estate planning, retirement planning, investment planning, and tax planning.

    After the first year (we don’t do a brand new plan every year), they can drop down to a ‘retainer’ level (mostly a nominal fee to recover the cost of our time from semi-annual meetings) for as long as they want…many choose this option to get some add’l tasks completed that they weren’t able to get done in the first year.

    Other clients, while we propose planning before products, choose to use us for simply product purchases (life insurance, opening a small Roth IRA, etc). They are few and far between, but there are a few, and it’s their choice.

    Due to the nature and scope of the financial plan we put together, I believe the one-time plan fee is justified in addition to any AUM retainer fee (though the plan fee may be subsidized due to AUM fees or product purchases). Again, we don’t do a brand new plan every year. An update, yes, but assuming that the AUM fee is valued correctly, updates-retainer fees can be part of the AUM fee. 4 or 5 years later, we’ll look at redoing the plan, based on life changes.

    Also, some of our AUM fees are very small. In cases like those, the AUM fee is not going to cover a comprehensive financial plan. But again, a comprehensive financial plan isn’t needed every year, so it’s not billed every year.

    Finally, I think it depends on geographic location-demographics-target market. We advisors argue over compensation models as if they were one-size-fits-all. I don’t believe it’s that simple.
    Respectfully submitted,

    • Michael Kitces

      The point of this post is not against retainer fees per se, but against having a-la-carte pricing structures that either make it easier for clients to opt out of planning, or force them to pay extra for something they’re not yet convinced is valuable to them because they haven’t experienced it. So if the retainer fee is the only structure that works for clients who don’t have a significant asset base, so be it – but even in that case, I would try to make it a single comprehensive retainer fee, not an a la carte menu of options.

      But I do think we create significant problems for ourselves with the structure you mention at the end – the one-time plan fee in addition to AUM. Why do we have to extract maximum profit from clients each and EVERY year? Don’t your clients stick around if you’re serving them well? If your client is going to be your client for the next 10 years, why is it such a crisis if they’re somewhat less profitable in year #1? And more importantly, how many 10-year clients do we NEVER get because they rejected our high-cost-in-year-1 structure.

      Most businesses offer LOWER-priced incentives in the first year to induce customers/clients to come on board and see for themselves the value that the business delivers. It seems very odd to me that we have adopted the exact OPPOSITE pricing structure, with a year-one surcharge.

      Who wants to pay a multi-thousand-dollar “set up” fee for a service they still don’t really even understand because they’ve never experienced it?

      – Michael

      • Tom

        maybe I should clarify a few things: 1) our financial plan fees are smaller than traditional plan fees, as we have other ways of making money (AUM, commissions on investments and life products), and that allows us to put more plans in the hands of more people, 2) we work with middle-class clients, too, not just HNW, 3) because we propose planning before products, and planning before taking over AUM, the client knows and understands the value of the plan…that’s what we pitch first…the AUM and any product recommendations are simply implementations of the plan, assuming they are in the client’s best interest. The plan is not sold ‘on top of’ asset management–the plan is sold first, and if they choose to implement through us, great!

        But yes, for HNW clients who are paying significant amounts for asset management, the planning fees can certainly be included in the management fee.

  • WBenUtley

    Michael, I dare you to write a post that defines the “quality financial planning experience” you mentioned here. What does that look like, exactly?

  • Ira Fateman

    I started a new fee system including a financial planning fee plus and AUM charge. However, my fees are still considerably lower than other firms and therein might lie the problem. How is a 1% AUM fee justified? How much income is fair? Maybe the 1% model does not provide the value it once did and 1% plus a financial planning fee is way to much. How about an AUM of .5% plus financial planning. Maybe our firm cost structure is too high or the perceived necessary income for partners or principals is not justifiable. Based on most market theory the true value/cost-benefit is in the planning. Maybe if we lower the costs more individuals can access our services and we can truly help those families that can benefit from planning services.

    • Michael Kitces

      The point here wasn’t really about total cost, but about bundled versus unbundled services.

      In other words, assume both firms are going to charge the client the same cumulative amount of dollars. Given that, should you charge 1% all-inclusive, or 0.5% + a separate financial planning fee?

      My case would be that if AUM is otherwise your model, the former is a better business decision than the latter.

      Which also means that if you need to charge more overall, you would likewise want to raise your prices by raising your single AUM fee, rather than adding on bigger layers of separate planning fees… because again, charging separately is usually what businesses do when they do NOT want people to utilize the service. If you WANT your clients to utilize planning as a part of an overall service offering… the best way to do it is not to nickel and dime (or quarter and half-dollar!) them over it. :)

      – Michael

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  • Bill Ramsay

    Thanks Michael, very good food for thought.

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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