How Much Does a Financial Plan Cost?
At the end of July, Globe and Mail Personal Finance columnist, Rob Carrick, wrote an article about the cost of a financial plan. For this post, I thought it might be helpful to review how I charge for the financial plans I create for my clients.
What I Present on the Money Architect Financial Planning Website
No products are sold
I am an advice-only financial planner. I don’t make money from selling you a financial product like an insurance policy or a mutual fund. Those potential conflicts of interest are eliminated.
Services are provided for a fee
A fee is charged only for the services provided, exactly as one would pay a fee when hiring a lawyer or an accountant. The fee is clearly and directly charged rather than hidden within the cost of a financial product.
Fees are charged on a sliding scale
I provide my services on a sliding scale fee structure to make financial planning accessible to more Canadians. Currently, the minimum fee to design a full financial plan is $1,000 while the maximum for 2021 is $3,000.
No referral fees are accepted or given
I don’t want to treat my clients as commodities to be traded for cash. This has been my policy since I began my financial planning practice in 2019.
Calculating the Fee
After being involved full-time in the investment industry since 2005, when I planned to leave that world for advice-only financial planning, I was searching for a fee structure that would be geared toward client affordability. Since I was no longer going to be directly involved in investing, I was not going to be able to charge based on commissions for transactions, embedded trailing commissions through mutual funds, or via a percentage of assets under management. One of the gurus of financial planning in the United States is Michael Kitces. In a blog post, he mentioned a fee structure that had immediate appeal to me: 1% of household income + 0.5% of net worth.
This is an example of what a fee calculation might look like. The numbers are hypothetical but represent an approximately average Canadian household:
The yellow fields are filled in as appropriate, which then generates a Fee and an Adjusted Fee. In this example, the calculated Fee is $3,932, but because it exceeds $3,000, the Adjusted Fee shows as $3,000.
Reviewing this from the top, the yellow fields for income come from line 26000, “Taxable income,” in the Notice of Assessment. I average the two most recent years to smooth the income. You can see that the Income field, in this case, adds up to $83,200.
Net worth can consist of several assets and liabilities beyond those in this example, but it is similar to what I often see. Again, filling out the yellow fields in the Net Worth section yields assets of $810,000 and liabilities of $190,000 for a net worth of $620,000. That figure is entered into the Net Worth field.
Income is multiplied by 1%. $83,200 x 1% = $832. Net Worth is multiplied by 0.5%. $620,000 x 0.5% = $3,100. $832 + $3,100 = $3,932. As the Fee is currently capped at $3,000, that is the figure that populates the Adjusted Fee field.
Note that there are fields for Anniversary Update Fee and Adjusted Anniversary Update Fee. On the anniversary of the plan, I encourage my clients to engage in a brief update of their finances with me so that we can periodically adjust, as necessary, their projections. Currently, I have set the fee for these updates to 10% of what a full plan fee would be at the time of the update.
Let’s suppose the identical situation, except that this example household does not own a home and therefore also does not have a mortgage.
The net worth drops to $200,000 and the fee also drops to $1,832. As the Fee is below $3,000, there is no adjustment, and the Adjusted Fee is the same as the regular Fee.
Finally, let’s look at a household with only one income. For this example, I have also reduced assets and liabilities.
In this example, the calculated fee has dropped below $1,000, to $926. The Fee is highlighted in red, the normal adjusted fee is struck through, with a substitute fee of $1,000 substituted below.
This fee arrangement is not necessarily ideal. For example, someone may have more substantial assets but have very straightforward finances, reducing the work required to create a plan. On the other end of the spectrum, someone with relatively low income and relatively little in the way of net worth may require a more complex financial plan with additional demands on my time. I reconcile myself to this particular issue by reminding myself that this is not about complexity versus simplicity; it is about affordability.
The Ideal Client?
As the home page on my website indicates, I have a soft spot in my financial planning heart for the self-directed or DIY investor, the client base with whom I worked for more than a decade. I opened this practice to give them the opportunity to invest in the context of a larger financial plan.
Another category of client I am interested in supporting is the person who has until now chosen the common default of going to the neighbourhood branch of their preferred financial institution, using all their products and services without considering other options. Maybe they want to go the DIY or robo-advisor route for investing, but they also realize that there is more to their financial lives than putting money into their RRSPs and getting a mortgage so they can buy a house.
I seem to be attracting two different generations as clients and I am pleased to work with both. Many are younger couples in their thirties seeking to make sure their financial house is in order for the future they envision. In terms of fees, they often fall somewhere in the middle of the $1,000 – $3,000 spectrum.
On the other end of the client age spectrum are those contemplating retirement or already in retirement. They want to know whether they have the financial resources and documents in place to retire with a sense of contentment and satisfaction. As one might expect after several decades of working and accumulating savings, these clients tend to have significant net worth such that they usually pay the maximum $3,000 fee.
That does not mean that clients need to be in their 30s or 60s to see me. I welcome clients of all ages. Whether or not you work with me, I think that everyone should be able to avail themselves of a financial plan.
This is the 110th blog post for Russ Writes.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.