Q21 – Can I charge flat or hourly rate fees for financial planning as an RIA?

Also available as podcast (Episode #21)

Apple  |  Android  |  Spotify  |  Amazon

Can I charge flat or hourly rate fees for financial planning as an RIA?

As a Registered Investment Advisor (“RIA”) you can absolutely utilize hourly and flat fee billing options to compensate you for services you provide to clients within your practice.  These two pricing mechanisms are only two of a number of different pricing options available for RIAs to utilize.  With all such options, the RIA itself retains 100% of the fee revenue.

Found This Video Helpful?

Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice?  I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.

Full Transcript:

Can I charge flat or hourly rate fees for financial planning as an RIA? That is today’s question on the Transition To RIA video series. It is question #21.

Hi. I am Brad Wales with Transition To RIA where I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

In today’s question, we’re going to talk about….“can I charge flat or hourly rate fees for my services?” In this case, the question was for financial planning. I want to actually expand the question and go over, not those two ways, but a wide variety of ways that as your own RIA that you can charge for services.

I’d preface this by saying I’m going to go over these at a high level. I do encourage you though, I did an entire whitepaper on 11 different ways that the RIA model is superior from an economic standpoint to you as the advisor, versus other affiliation options. I encourage you to go check that out. If you’re not already there, go to TransitionToRIA.com. Right at the top is a link that says “whitepapers”. Click on that. You’ll be able to easily find it. It goes into detail on this sort of topic and, like I said, 11 different ways. I encourage you to take a look at that.

On today’s video, we’re going to talk about….”can I charge either flat fees or hourly fees?” So, again, I do want to go through a variety of ways. That is two of them, that as your own RIA, that you can charge for services and the flexibility this gives you versus maybe what you have available to you now.

As I go through these, mentally ask yourself….“do I even have the flexibility to do that now under my current situation?” Some of you, I’m sure you do. The first one, the most common one out there, is charging as a percentage of assets.

Whether that’s a 1% fee or a 1.5% fee, or something less than 1% fee. As your own RIA you can continue to do that as well. Some of the flexibility, though, as your own RIA is you get to set that fee schedule on your own. Right now, if you’re at a large firm, they’ve set that tiered fee schedule for you. You have to play within that schedule. And sometimes, at some firms, if you choose to discount off of that, in turn the firm will reduce your grid rate that you get paid on that account.

As your own RIA, you get to set your own fee schedule for what fees you want to charge clients, of what size, or however it is you want to make that determination. You also have the flexibility to decide the frequency and the method in which that fee is charged. Do you want to charge that fee quarterly? Or do you want to charge that fee monthly? Do you want to charge in advance or in arrears? Again, as an RIA, you have full flexibility to decide that on your own.

The next one, which is related is….some RIAs don’t want to necessarily go out there and say….“we have a minimum client size of $1 million” or half a million dollars, or whatever the case is. Whatever the reasons they’d prefer to not have to throw that out there. However, they do realize that the economics involved with managing a relationship necessitate that a certain amount of revenue come in from a client.

One way as your own RIA you can get around that is not to say….”Mr. and Mrs. Client, I have a minimum client size of X,” but that you do have a minimum fee of a certain amount. And so, if you wanted to use your fee as a percent of assets, you could say….”my fee is 1% of assets, but it is a minimum of $1,000 per quarter.” No matter what that math comes to on the 1%, my minimum is a $1,000 per quarter. You’re effectively making a minimum client size without necessarily forcing them away.

However, if that smaller client, if they feel that the services and value you’re going to provide for them is worth at least that minimum fee size….even if the aggregate math on that says that comes to 1.5% on assets versus your normal 1%, you should be able to offer that service. You have flexibility as an RIA to implement that sort of arrangement where you can say….“I have a minimum fee of a certain amount. I don’t necessarily have a minimum client size.”

Next up is hourly fees. If someone wanted a one-off kind of project or something that was maybe laborious for you to have to work through, you, certainly, if you wanted to, could charge an hourly fee. Perhaps you charge $300 an hour and you say….”this is estimated to take 10 hours of my time.”

You can even make tiers of that. You can say….“I have a lead advisor on this. It’s $300 an hour.” And if it’s maybe a more junior type issue, you could have a junior advisor (work on it) and that advisor is at $175 per hour. You have full flexibility to implement that sort of a fee arrangement. You get to decide what those fee levels are.

Next is flat fee. Example….”I will do a financial plan for you for $2,500,” or “I will help you look at your 401k options and get that implemented and answer all your questions. And I will charge you $400 for that.” You have full flexibility on what kind of services you want to offer for this flat fee and what that flat fee dollar amount is. You also have flexibility to be creative with this.

I’ll give an example. I know of an RIA that has grown quite well. They have – I realize it’s sometimes harder to implement this sort of thing, but I think it gives them a lot of confidence and it gives the client a lot of confidence that “Wow, this RIA knows what they’re doing,” – they charge $250 for an initial consultation with a prospective client. If a prospective client wants to sit down with the lead principal, it’s a $250 initial consultation fee. And “if, Mr. or Mrs. Client, you become a client of our firm, then we waive that fee, but otherwise, it will be $250.”

That really helps them weed out people that are serious or not. “Are you willing to pay $250 to come in and have a conversation?” Then it maybe helps with that decision of winning their business that the client might think….”I’m already $250 into this, what he’s saying sounds great, why would I want to walk away from the $250? Let’s go ahead and do this.” Then that will be waived. That’s one example. The idea there is the creativity you can have with how you can structure fees.

Next is something that we seem to be seeing more of out there is this retainer or subscription-type model where – and it’s a build-off of a flat fee – where you charge, as your own RIA perhaps a monthly fee. You say, “$150 a month, and I do services of X, Y, and Z.” And that’s what you provide. Or, “I charge $2,000 a quarter, and these are the services I provide for that.” It’s a reoccurring $2,000 every quarter, so a retainer or subscription, whatever you want to call it.

That’s a way to work with smaller clients as well, that don’t necessarily have a lot of investible assets, but who could use your financial planning and expertise. And who perhaps one day might develop assets and then make it worth your while that you could charge under one of these other mechanisms. But it’s a way in the interim to provide that service.

Now some of you might not have any interest in doing anything like that. But some of you might think….”there is a subset of the prospect universe out there I talk to that I simply can’t make it work charging a percent of assets, but wow, if they would pay me $200 a month and yeah, that’s maybe a scaled-down service level than what this client over here that’s effectively paying me $10,000 a year, but that’s fine.” You lay out your services and here’s how much it costs. Perhaps some clients or prospective clients out there that would be willing to pay that.

The last one that I’ll mention is your ability to go out there and advise on assets held elsewhere, not immediately under your management or in custody at the firm you’re at. Whether that’s someone has a workplace 401k, and they want advice on that, and they have no idea what to do. They don’t know what these mutual funds are, what should I do? You can charge a fee and say….“bring in your statements. We’ll look at it and I will charge you (whatever dollar amount) and help you with that. And once a year, we revisit it.”

You can also go out and work with 401ks at that plan level. Working with companies there locally to you, perhaps and say….“you need better help there at the plan level,” that’s another way you can charge for your services as well.

The important factors to keep in mind with all this is that you get to decide how you want to structure all these. I named a pretty good list of them. It’s not necessarily an exhaustive list. There’s perhaps other ways out there advisors are charging for their services. But as an RIA, you have full flexibility to implement any or all of these with your client base and decide, how you want to package them with the price and the service level you offer, and how you want to message that out to clients. You absolutely have the flexibility to do that.

Most important, as your own RIA, you keep 100% of those fees that come in. Yes, you do have expenses to cover for the RIA. I did a whole video on how much you can generally expect as an RIA to make on your bottom line. Go check out that video if you want to see it. But on the way in the door, every single one of these mechanisms, whether it’s hourly, a monthly subscription fee, a flat fee, a percent of assets, 100% of that goes to you as the RIA. The custodian you’re using or any other vendor you’re using doesn’t take a hair cut on that, or a grid payout on that.

Important too, they also doesn’t penalize you on, for instance, smaller accounts. A lot of comp plans now at the large traditional brokerage firms penalize you on smaller accounts. It’s….“if you want to have this account under a certain amount – that’s assuming we as a firm even allow you to have that account, or we don’t force you to move it over to this call center – if you want that account, we are going to pay you a reduced grid rate on it. In some cases, we might not pay you anything on it at all.”

Whereas in the RIA space, if you want that small account, and if you decide it makes economic sense for you for some service level, and there’s revenue that’ll come in, 100% of that is retained by you as the RIA. That’s a big difference there.

An example I wanted to give of why this is so important, and I actually gave the same exact example on the prior video. Video 20, you can check it out there too. It’s this concept HENRYs. It’s an acronym, HENRY. It stands for High Earning, Not Rich Yet.

The classic example of that is the doctor, the freshly minted doctor that has finished medical school, has finished residency. They’re now out there working full-time, and they’re making a very good income. They’re earning a lot of money, but because they’re at that stage in their life, they don’t yet have a lot of investible assets. But considering their earning level, their income level, there’s every reason to believe they will grow into potentially a very good (asset) client.

The challenge is….that doctor might have only $40,000 total of investible assets, maybe even less. A lot of you, unfortunately, might be at a firm now that if you try to come in with a client, who at face value is $40,000….”We don’t open accounts for clients that small,” your firm might say. Or, “You need to push them off to this call center.” Or, “Mr. or Mrs. Advisor, I don’t care how much work you do for them. You’re going to get paid this penalty grid rate on that, or maybe paid nothing at all.”

I think that’s incredibly shortsighted because that doctor, yes, right now, might not have a lot of investible assets. But if you can foster that relationship, they might very well have a lot of investible assets later on. As an RIA, you will not be dictated to whether or not you can have that client. You absolutely can choose on your own whether you want to have that client.

For the examples I gave, you can also start getting creative with that. Eventually he or she (the client) will have a lot of investible assets. As an advisor, I typically charge my fee as a percent of assets, 1% or whatever it is. One day they will have a large account and that will make it worth my while under that 1% mechanism.

You have the flexibility in the interim to say….”Mr. or Mrs. Doctor, I’d love to start helping you. Here’s all the services I’m going to provide. For that I’m going to charge you a quarterly flat fee of $2,000 per quarter, and I’ll help you with X, Y, and Z, and all these things in your financial picture. I’ll even do your asset management for you for that $2,000.” Then one day, when the account grows larger, maybe you shift them at that point to a percent of assets fee. But in the interim, you can work with the client. No one’s telling you you can’t.

You have the flexibility with the way you can charge for your services to make it worthwhile for both the client and you, until they reach that point where maybe they do have those investible assets. I think it’s incredibly shortsighted of these large firms to look past those opportunities. If you were to transition to the RIA model, you’d never have to worry about that again because you have control over that.

A parting shot I’d leave you with is to think these through and think through….if you were to start your own RIA, which of these different fee service levels might you put in place that you either currently are unaware of, or you’re currently not allowed to, or perhaps the economics don’t currently make sense because if you were to do it, the firm would take X% of it, so it makes no sense to do.

As your own RIA, if you had those handcuffs removed and you had all this flexibility and options, and you kept 100% of that fee, I challenge you to think through….”What would I do? What sort of clients could I work with? What additional services could I offer because I can charge for them?” That’s one of the real benefits of the RIA model is the flexibility you have. I really challenge you to think that through.

With that, like I said, my name is Brad Wales with Transition To RIA. I help advisors like you understand everything there is to know about why and how to transition to the RIA model.

Today’s conversation, a perfect match, a big part of….”If I were to start my own RIA, how does it work for what I can charge clients, and how much do I receive, and what are my options?” Everything we talked about, that is the sort of thing I help advisors with all day long. I would be happy to have that dialogue with you as well.

If you’re not already there, head on over to TransitionToRIA.com. I have plenty more videos you can look at. I have whitepapers. And then the easiest path is right at the top is a contact link, click on that. You can instantly and easily schedule a specific date and time, and we can begin having a dialogue like this.

What I do is I get to know advisors. What is your current situation? What is your current affiliation model? What does your current client base look like? What do you want to do with your practice over time? And then I help you to understand what might that look like under the RIA model. From an economic standpoint, flexibility standpoint, control standpoint….and really help advisors understand the entire range of how the RIA model works. I’d be more than happy to have that conversation with you as well.

I hope you found value in today’s video, and I’ll see you on the next one.

Want To Learn More?

Schedule a Discovery call and lets begin a conversation.

Share this post

Read my free whitepaper!

Get instant access to my free whitepaper on "11 Ways The Economics Of The RIA Model Are Superior To Other Advisor Affiliation Options".
FREE WHITEPAPER:  “Steps To Take Now If You Anticipate Transitioning Your Practice To The RIA Model Anytime Within The Next 10 Years.”