Financial Advisor Insights

How Do Financial Planning Firms Charge for Their Services?

Savvy

February 14, 2024

#Savvy

Financial planning is an essential service for managing your finances and achieving your financial goals. However, the fees and billing structures used by financial planning firms can vary greatly, which is important to understand when choosing a firm. In this comprehensive guide, we will cover the most common ways financial planning firms charge for their services when working with high net worth individuals and families.

Assets Under Management (AUM) Model

The most popular fee structure used by financial advisors is the assets under management (AUM) model, which charges clients an annual fee based on a percentage of the assets in their investment portfolio managed by the advisor¹. This fee generally ranges from 0.50% to 2.00%, with the average being around 1.02% for a $1 million portfolio²^.

The advantages of the AUM model are that fees scale up and down with the size of the portfolio, incentives are aligned for advisor and client, and it allows advisors to offer comprehensive planning and investment management services. The AUM fee may also decrease at higher asset thresholds through a tiered structure³. For example, accounts under $1 million may pay 1.2%, while accounts above $5 million pay 0.8%.

Typical AUM Fee Structure:

Up to $1 million: 1.00%
$1 million to $5 million: 0.85%
Above $5 million+: 0.50%

This model works well when an ongoing advisor-client relationship is desired for investment management and financial planning. However, it does little to help smaller investors, as minimum account sizes for AUM advisors often exceed $250k or more.

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Hourly Fees

Some financial advisors charge strictly by the hour for financial planning services. Hourly rates typically range from $200 to $400 per hour, with rates varying based on expertise, experience, credentials, and local cost of living⁴^.

The main advantages of hourly fees are transparency and flexibility. Clients only pay for the time and services rendered, which works well for one-time planning needs. The downside is that incentives may not be fully aligned for the client’s long-term success. Hourly engagements also require discipline to avoid scope creep.

When Hourly Fees Work Best:

One-time financial check-ups or second opinions
Advice on specific financial planning components (college, retirement)
Clients with simpler situations

Hourly fees allow those with more modest incomes access to financial guidance at affordable rates. However, comprehensive planning, investment management, and ongoing services are better suited to AUM or retainer fee structures.

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Retainer Model

Financial advisors may also charge an annual retainer fee that provides access to a broad range of financial planning and advisory services. Retainer fees often range from $6,000 to $10,000 per year⁵. The retainer model guarantees the advisor income while allowing flexibility in services.
The main advantage of the retainer model is the ability to customize services yearly based on the client’s changing needs. It also provides clients with access to the advisor for questions and guidance as needed. The drawback is that costs are not tied to portfolio performance.

Services Covered by Retainer Agreements:

Scheduled review meetings (1 to 4 times per year)
Phone/email access to advisor
Tax planning & preparation
Estate planning guidance
Financial reporting
Goal setting & tracking

For high net worth individuals and families, the retainer model allows for flexibility in the amount and type of services needed from year-to-year. This allows the advisor to provide value in multiple facets of financial planning rather than just investment performance.

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Flat or Project Fees

Some financial advisors will charge a flat fee for a financial plan or specific project. For a comprehensive financial plan, flat fees often range from $1,000 to $3,000⁶. The main advantage of flat fees lies in their simplicity and cost control. The client knows exactly what the service will cost upfront. However, flat fees do not cover investment implementation or ongoing services.

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Common Flat Fee Services:

One-time financial plans
Retirement projections
Goal funding analysis
Investment portfolio analysis

Flat fees allow those new to financial planning to dip their toes in the water without committing to an ongoing fee structure. However, flat fees alone do not suffice for the complex needs of high net worth clients requiring sophisticated planning, tax strategies, and portfolio management.

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Hybrid Fee Structures

Hybrid fee structures combine two or more models to maximize flexibility. For instance, a firm may charge an annual retainer fee for financial planning services while also using an AUM fee for portfolio management.
Popular hybrid fee structure pairings include:

AUM fee + Hourly fee
AUM fee + Retainer fee
Retainer fee + Hourly fee
Retainer fee + Flat fees

Hybrid fee structures allow financial planning firms to cater to high net worth clients with customized service levels. Those needing extensive plans or tax guidance can leverage hourly or flat fees as needed in combination with AUM portfolio management. This flexibility provides value across planning, investing, tax, and other facets important to high net worth individuals.

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Fee Structures Used by Savvy Advisors

As a hybrid financial planning firm catering specifically to high net worth individuals, Savvy Advisors utilizes a combination of the AUM fee for portfolio management and a flat fee for the initial financial plan.
Ongoing access to financial planners is also provided to clients for questions, guidance, and plan updates as needed. This combination offers comprehensive wealth management while aligning incentives through portfolio performance.

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Key Considerations When Selecting a Financial Planning Firm

When researching financial planning firms as a high net worth individual, keep the following fee considerations in mind:

Customization: Look for flexibility in services catered to your needs rather than a rigid one-size-fits-all planning process. Firms should account for complexity factors like trusts, tax planning, estates, etc.
Transparency: Require full transparency on how all fees are calculated and assessed. There should be no hidden fees buried in the fine print.
Incentive Alignment: Ensure advisors are incentivized by your long-term financial success rather than upfront commissions or fees. Skin in the game is crucial.
Reporting: Ongoing reporting should be provided for performance measurement and to track progress towards financial goals. Technology integration is a must.
Accessibility: Seek a firm that provides access to advisors when needed to answer questions. Larger firms often restrict direct access and support.

The fee structure is just one component of the planning relationship. However, finding a firm that maximizes value across financial planning, portfolio management, client service, and reporting tailored to your unique needs is key to the success of high net worth individuals and families.

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