[00:00:00] Speaker A: In this episode, we cover some factors that help explain why financial advisors charge what they charge. And we give you some data so you can determine for yourself whether it's really worth paying one $6,000 every single year. Let's get started. Let's get some money from new money new problems. It's the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation. Purchasing your first investment property. Helping your family with money. The highs and lows of entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
Hello. My name is Brenton Harrison of New Money new problems, and your host for the new Money New Problems podcast. I, uh, don't know whether or not you'll be able to hear some background music in this episode, but if you do, it happens to be because I am traveling for work this week. Had a speaking engagement, knew I wanted to get an episode out for you guys on Friday, but based on some poorly timed travel, I am recording this in the lounge of the hotel lobby. Maybe you won't be able to hear it, but if you can, you know, the music's pretty nice, so there could be an unexpected ambience or vibe to this episode. So bear with me. We took a break for student loans, but for the most part, over the past couple months, we have been rotating between episodes on homeownership and then also episodes on financial. In this episode, I wanted to talk specifically about pricing, because we have been pretty adamant in recent years about making sure that before people even reach out to us, they understand what we charge and also that we feel we offer a premium service that is worth that expense. Otherwise, we wouldn't charge it. But when you hear numbers like what we throw out, what we charge, 5000 a year for individuals, $6,000 a year for couples and small business owners, and that could change over time. So if you're listening to this episode three years from now, don't call us and try to hold us to this price. But if I were you and I were hearing that, that would be easy to say. But I would also want an explanation for how an advisor comes to that cost. And what are some of the factors that go into what they decide? So, before the break, we're going to tell you five factors that can help dictate the price that you get when you go to a financial advisor. Why some are able to charge less than others, why some charge far more than others. Then after the break, we'll talk about our specific services, how we came to our pricing, and how we feel you should judge the value of any advisor with whom you're considering working. The first factor that goes into what a financial advisor chooses to charge their clients is their service model. Uh, I told you that there's been an evolution of our service model and our pricing over the years. And that is a very true statement, because when we first started doing fee based planning, where we were charging clients a fee on an annual basis to provide certain services, instead of 5000 or 6000, we actually charged $2,200. And when you look at financial services in most cases, and we'll talk about the cases that are kind of exceptions to the rule, but in most cases, the price that you pay gives you some indication as to the depth of service. I won't say quality of service, because there are people out there who charge a lesser amount who provide very quality services. But depth of service talks about how much work that advisor may be doing, the number of different areas of your planning they may be touching or giving advice on, and also how frequently you may meet with that advisor or their support staff. So when we had our service model at $2,200, we had a very broad type of planning, but we didn't have much depth to our planning. So, for example, we would have all of our clients in and we would do a fact finder, which in financial services just means that you're having a meeting with them and you're getting notes on as many things as possible regarding their finances. And there would be certain things that we would identify that our planning needs for that couple or that individual or that small business owner. And because of what we were charging, most of our advice, that we would follow through with the customer, meaning, we told you this is something that you needed to do, we're going to follow through and do this with you had to do with other things from which we may receive payment. For example, if you had an investment account that we would manage, we would help you go to your old 401K provider, roll that into an investment account that we may manage. Now, there may be other things that we would see, like, hey, you need a will, an estate plan, here's some things that we would recommend. But the follow through in terms of sitting with them in the client meeting and helping them open that account, even though it's not something for which we'll be paid, was simply something that we didn't have the time to do, because when you're charging $2,200, understand that the advisor does not take that home. As a matter of fact, I would say for your typical advisor, in terms of what they bring in revenue, if they can take home half of that in terms of their operating profit, they're doing pretty good. So if you're charging a client 2200, let's say that the advisor actually brings home 1100 of those dollars for themselves and their family. Well, if you're making $1,100 from a client, one thing that you're going to come across very quickly is the need to get as many clients as possible. You're also going to understand that you can't afford to meet that frequently if you're also bringing in as many clients as possible. So if you're facing down that scenario, you might say, instead of 45 households, I'm going to try to get 100 households. And that may make your model profitable. But now keep in mind the fact that you have to onboard and maintain the service for all 100 of those households. And you will see very quickly where I'm talking about, where you're unable to do so and provide depth of planning. You may be able to broadly speak to many of their financial needs, but you can't get that deep into actually implementing some of those things based on the service model that you have. And that brings us to number two, and that is the support structure for onboarding and maintaining the service of those clients. Let's go back to our example and assume that this person has decided that they want 100 people who are going to sign up for their new advisory firm? Well, how do you make sure that you get invoices to those people to pay on time? What are you going to do to make sure that they have an easy process in terms of getting you the information that's needed to open the accounts? What are you using for a scheduling system? How do you make sure that you have that same process that's repeatable and scalable to make sure that it works in the same way for client 100 that it does for client one? It takes a ton of research, it takes a ton of time, it takes experience in the business to understand the structure in terms of how you maintain that client base. And getting that structure and establishing that structure typically costs money that actually leads into number three, which are the operational costs that are associated with your firm. If you look at our model, new money, new problems is actually part of a network of advisors across the country called innovative financial group. Innovative financial group is under a broker dealer called OsAIC. And each of those different levels, whether it be innovative financial group or OSAIC, they provide certain resources to advisors who affiliate with them, whether that be compliance support, marketing support, even things, um, that you wouldn't think about, like payroll and bookkeeping. But they do all of those things at an expense. We pay an affiliation fee to be affiliated with Osaic. Uh, we have certain expenses to be affiliated with innovative financial group. We have technology cost when it comes to just the things that we spend in order to keep our firm running up. From a technology perspective, we spend over $25,000 a year just on technology. There are licensing fees. Every single time that I want to get licensed in a new state, I have to pay for the investment licenses so I can manage investments in that state. I also have to pay for the insurance licenses to be able to offer insurances in that state. Salaries are a huge expense. All of those things that speak to why a, uh, financial advisor doesn't actually bring home 100% of what they charge. But all of those operational costs can add up. And in many cases, the deeper the depth of your service, the more expenses that you incur to actually provide those services. So, for example, we do tax analyses now that we didn't do when we were charging 2200 that we can now do at 6000. But a part of that is, in addition to providing that service, we also pay over $1,500 a year for the technology that we use to put together those tax analyses. We have a portal where all of our clients can aggregate their financial data, and on one platform they can see everything from their mortgage to their student loan balance to their investment accounts. But we pay over $3,500 a year just for them to have that feature now that we couldn't have afforded to do when we were only charging 2200. And as an advisor, I have also chosen, in terms of how we've set up our operations for me to be the only advisor. And then we have our director of operations, Danielle, who is client facing as well. We have independent contractors that we pay as well. But the fact of the matter is, if we were in a shop where I decided that I wanted to partner with two or three other advisors, then anyone who was either getting paid on a contract basis on salary would have those costs shared by all of the advisors in that office. So you might have an advisor that's able to charge a little less because they're sharing in the costs of the office with four or five other people, or ten or 20 other people, or even one other person. Or you may have a person who is paying for those costs all themselves, but wants to still provide a deep quality of service. And as a result, they have to hike their fees to make sure that they can cover all those costs and still maintain their cost of living. Number four is recurring revenue or additional sources of revenue. As a recap, a registered representative is typically a person who's earning all of their revenue through commissions, through things like mutual fund sales, annuities, and insurance. A, uh, fee only advisor is a planner who only receives revenue from things that come through fees, like charging assets under management fees or charging planning fees like ones we're discussing in this podcast. And a fee based advisor is a blend of the two. They have the ability to offer services where they're simply charging a fee, but they also offer products like insurances or annuities from which they can receive a commission. Now, if you have a fee only advisor, and they don't have the ability to earn revenue from things like an insurance policy, then that's a crucial source of revenue that they've decided to forego. And it means that they have to make up all of that lost revenue through things like their planning and their assets under management. And a portion of those fees are what we call in the industry, stickier than others. So, for example, when you charge a financial advising fee, if you have a year long contract, then every single year you have to go back to that client and you have to ask them for their business again. And you have to articulate the value that you provided in the past and the value you plan to provide in the future. And you have to have them make a decision of whether or not they're going to continue for another year. That is much harder in many cases than having a client stick with you when you're charging them a fee for assets under management, like with a planning fee where that person is writing you a check every quarter, or they're paying on their credit card every single month. With assets under management, those fees are typically deducted from the invested account that the person has with your firm, so they don't see it as easily. And you also don't want a year to year basis. Have to go back to an assets under management client and ask for their business again. As long as the account stays with your firm, you have their business. And if that planner is also not receiving revenue from things like insurance, then they've put themselves in a position where they're taking on clients at a high enough price point where if there is any client attrition, they still have enough remaining where they can maintain their business. And then lastly, number five is market rate. So I told you about us charging $2,200, and to me, at the time, I was charging $2,200.01. Of the crucial flaws in decision making that I made was that I did not check around and check the market for market pricing when I set our cost of services. After a while, however, when I realized I had to take on so many clients in order to earn revenue that I didn't even have enough time to honor the commitments to the one that I already had, I started looking around and figuring out, why is this the case for me? What are other people charging? Because they seem to have a whole lot more free time and more quality of life than I do, and they actually have the time to dig deep with their clients and provide them real value. Whereas I feel like I'm always sprinting from one meeting to the next, unable to take the time that I really want to get deeper into some of these topics that I've opened up with my clients. And I first started looking to black and latina advisors who worked with similar client bases to the ones that knew money, new problems. And I made sure that they were similarly licensed. I wanted to make sure that they had at least a certified financial planner designation, and they also had to have their fees prominently displayed on their website. And we put together a spreadsheet of 25 advisors that we consider comparable to our firm, and then also an additional 25 advisors for 50 total who didn't meet those metrics per se, but they were still a youngish advisor with a youngish clientele, uh, who had their fees prominently displayed on their site. There are firms who definitely charge more than what we charge, and there are firms who charge less. But when it came time for us finding the average of those 50 households, we found that for individuals, they charged, on average, at the time, $4,891 a year. And for couples and small business owners, they charged, on average, $5,790 a year. So when we determined our prices, we literally just rounded up to the average of, uh, what we found from those 50 advisors. And that led to some very uncomfortable conversations with clients when we told them, hey, relative to the market, we know that you've been paying this price over the years, but we need to increase it. But the best way I could describe it is if you owned a supermarket and you were selling a bag of chips at your supermarket for a dollar, and then you looked around and you realized that there are three other supermarkets within 5 miles of yours, and they're selling that same bag of chips. But they were selling it for $3. Nothing was different about the bag of chips. They tasted the same. The delivery costs were the same. The cost of keeping it on the shelf was the same. I think you can agree that even if it was your fault that you were charging $1 because you didn't ask around, you wouldn't continue offering the chips at $1 when all of your competitors were offering it at three. So while we're not always trying to be at the top of the market, we do want to make sure that we are market rate for our services.
[00:14:15] Speaker B: This is the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:14:33] Speaker A: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news.
We've crafted the new money new problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household. Please head to newmoneynewproblems.com gapfinder to complete it today. Again, that's newmoneynewproblems.com gapfinder. To take the assessment.
[00:15:12] Speaker B: You'Re listening to the new Money New Problems podcast. Subscribe
[email protected]. Welcome back.
[00:15:23] Speaker A: Before the break, we talked about the five factors that go into how a financial advisor determines their pricing and the structure of their pricing for their clients. Now I want to talk about the value to the client themselves. When people come to us and they're deciding whether or not they are going to be a client of the firm if they've never worked with a financial advisor before, they're really describing this very nebulous set of circumstances that would lead to them saying that this was worth paying for or not. I just want to feel better about my money, or I just want to feel like I have a plan that will work for me. That's not necessarily something that you can tie a dollar value to, right? Like, how do you know what exactly to pay someone when you're feeling that you're looking for is to just feel better about the direction of your money. But if you've never worked with an advisor before, there are some very tangible and concrete things that we can do that you likely haven't put in place in your own fund life that we can do throughout the course of our planning that add real value. Now, some people know exactly what they're looking for, but many come in asking for our guidance on how to put together a plan of action that has that value. And that's why we put together a meeting structure that, in the absence of a plan from the client, we know will touch many of the high points that are needed to make sure that each area of their finances are addressed. If you're looking on screen, you can kind of see the skeleton of that structure, and that could touch a number of different areas. It could be something like estate planning, where we're going to have a meeting where we talk about the different things that need to be reflected in your will or your revocable trust. It could be an investment meeting, where we talk about establishing a non qualified brokerage account. It could be a student loan meeting, where we're talking to you about the different payment plans that you have access to and whether you should choose the save plan versus the pay as you earn plan. Now, in year one, that could mean that we meet with the client six or seven times. It could also mean that we meet with them eight to twelve times. It all depends on what they need as a result of their financial analysis. But it also means that in year one, you have a very time intensive and labor and document gathering intensive process that touches everything from opening a 529 for your daughter to increasing the replacement value for your home on your homeowners insurance policy. It is comprehensive. Now, because of that workload in year one, you often see many advisors who will charge an onboarding fee. They may say, we charge $6,000 a year, but in year one, we charge a $2,000 onboarding fee to represent that additional work in year one as compared to years two and beyond. Now, as a firm, we've chosen not, uh, to do that. We don't charge an onboarding fee. We charge the same price in year one that we charge in year two. But because most people don't pay the onboarding fee, their question in year two is, well, we did so much work in year one. If we have this plan that we put together, what are we going to work on in year two? And why would I pay the same price when we did so much work in the past twelve months? It's a very good question, but many times people underestimate the things that pop up on a year to year basis for which they might require advice from their planner. And we structure that so that we make sure that in each quarter there's something that we're focusing on. In quarter one, it might be goal setting and updating your cash flow analysis. Final tax considerations. In quarter three, it might be us, uh, sitting down and having a plan to look over your investments or your student loans, or evaluating your mortgage. In quarter four, we might talk about employee benefits recommendations and some end of year tax planning. And in structure, we meet less frequently because the goal is to have put a plan in place in year one that we are monitoring in years beyond until that plan needs to change. And when you think about the value of a planner in year one, if you don't have someone you trust or have never had anyone to take a look at your finances, I can tell you that you get to a level where you can only do it yourself. But to a certain extent, we charge $6,000 a year for a couple, and we recognize that not everybody needs to come and pay $6,000. Based on your income, your assets. You may either need to or be in a position where you have to look at our YouTube videos, listen to our podcast episodes, find other resources you trust, and try to cobble together your own financial plan. Because we may look at what we're going to provide to you and say, just as a percentage of your income, it's just not worth paying a percentage that high. If you're making $75,000, that's a great income. But if that's your household income, it simply doesn't make sense in most cases to pay someone $6,000. But if you're making $300,000 and you're trying to figure out, is this worth paying for? I can tell you that in many cases, you can underestimate the number of different holes that can exist in your finances. And even if you're someone who considers yourself astute, having someone who's detached and able to look when you're working and say, here are some things that you need to adjust in these areas of your planning, it can be extremely helpful. Now, in year two, there's always the consideration of, again, if that work's been done, why would I pay for it again? Especially if it's the same price. And the best thing I can tell you is the value that's provided in a financial planning relationship is not linear, because many of the things you either implement or avoid in your planning relationship are things that will either bring your family a significant sum, um, well beyond what you paid in future years, or it may save you a significant sum or save your family a headache and maybe you see that the year that you signed up for it. Or maybe it's something that you actually never see, but your family sees. I've told a story about paying the, uh, first death claim to the family of a client of mine who had passed, and it made me feel so good. Not that they had passed, but knowing that I was delivering a check for a life insurance policy that that client did not want to sign up for. The only reason they did it is because I was adamant about them doing so, to the point that I said, if you don't sign up for this policy, I need you to sign a letter explaining that I advise you to do so. And you decided against it, because the last thing that I want is for you to die. And maybe sitting in front of your widow, unable to sustain her style of living, unable to make sure that those kids are in the school that they're planning to attend because of something that you didn't implement, that I told you to do. There are other things that may seem like small things, but over the course of time, that value is there. For example, we're dealing with a lot of people who are navigating student loan payments right now, and many of them are looking at the save plan and they're saying, hey, when I compare the Save plan to this other payment plan, it saves me about $160 a month. But those clients also are typically paying back student loans that they took out in graduate school. And I'll have to explain to them, yes, the Save plan has the lowest monthly payment in most scenarios, but for graduate school loans, it means that you have to pay on those loans for 25 years until they're forgiven. Whereas if you use the pay as you earn plan, your payment will be 100, $5160 a month higher. But the forgiveness comes after 20 years instead of 25. When we run the numbers, many of them may choose to pay a little more now in exchange for having those loans forgiven five years faster. But how do you value that? Do you value it based on the amount of student loans that you have forgiven? Do you value it based on the total payments that you made on the pay as you earn plan versus the save plan? It is not as easy to connect the value from the payment that you made to the services that you receive, because it's not linear. So, while I can't answer definitively for you whether or not it's worth paying an advisor five or six or seven or $12,000 a year, I can tell you that your expectations for how you approach those services is a little different than how you approach the value of some other services in your life. But I do believe that when you reach a certain amount of income or a certain amount of responsibilities, that the costs of poor planning are higher and higher. The cost of you making a mistake or the cost of you overlooking a crucial element of your finances is higher and higher. With the more income and the more responsibilities you have, and having a credentialed planner whom you trust, who can articulate a vision for your finances, map out how you're going to get there, and make sure they have checkpoints in place to monitor that plan moving forward can be of, uh, immense value above and beyond what they're charging you every single year. See you next week from new money, new problems this was the new money, new Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
