Navigating the Downsides of Advice-Based Compensation

By Juliette Fairley

When RIA regulators arrived at Safe Harbor Financial Advisors’ offices in May for an inspection, the Virginia state examiners had no problem with hourly rate compensation.

“They spent a day in the office looking through our books and records to make sure we had a continuity of operations plan and that we were not falsely advertising our services for what clients pay,” said George Reilly, a CFP who charges $240 an hour for financial advice.

As long as the client is not locked in and can quit anytime they choose, the state inspectors communicated to Reilly, advice based compensation is acceptable.

"Under service offerings on our website, we post our rates and payment terms are stated clearly in an engagement agreement that clients sign,” Reilly said. “The stipulation they require is that an ongoing payment schedule be consistently disclosed.”

Passing muster with regulators is just one obstacle that financial advisors face when developing an advice-based compensation business. Other challenges include establishing a baseline for hourly pay, helping clients understand why they are now charged for financial advice that was previously complimentary and increasing the number of clients to make a profit.

The problem with setting an hourly rate for financial advice, for one thing, is that there is no baseline or norm for what to charge. It ranges from $150 an hour up to $500.

“What an advisor charges is completely subjective,” said Garrett Donnelly, founder and CEO of Donnelly Investments in Atlanta. “Each of us has an economic bias, which is to make money from the professional advice that we provide. It’s a question of finding the proper balance between my economic bias and doing what’s right for the client without taking advantage of them financially.”

Retraining clients to pay for wisdom they have been accustomed to receiving as part of assets under management is another common challenge.

“To combat this, advisors need to clearly define the advisor-client relationship as financial planning and not asset management,” said Eric Lai, CFP and founder of Archvest Wealth Advisors in Walnut Creek, Calif. “If your last name is within the title of your firm, it's not a financial planning-based business.”

CFP Randall Bruns in Illinois is currently transitioning away from the traditional AUM model and towards charging an hourly fee of $250.

“To show a new client the value of paying for my financial knowledge, I use a chart that displays the toxic impact of percentage-based fees on real, inflation-adjusted wealth,” Bruns said. “I also show them a simple summary of what an end product’s performance might look like in an hourly relationship.”

When financial advisors switch to an hourly payment model, some are finding that they must accommodate a higher number of clients to make a profit.

“I split my hourly rate for financial planning and investment advice,” said Michigan-based CFP Robert Schmansky, who charges $250 an hour for planning and $350 for investment-related advice. “Hourly clients don't realize the actual amount of work that goes into managing a portfolio or the number of questions and problems they'll have along the way. I try to discourage it by charging more.”

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected].

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for The New York Times, The Wall Street Journal, The Street and many other publications. She is a member of the American Society of Journalists and Authors, the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected].