This is not meant to open up the fee vs. commission debate, because I am not proposing that we don't get paid for implementing and/or managing the investments. I am suggesting that our compensation programs should reflect the relative value of what we do. And charging a one-time fee for a "plan" is not good enough. We do planning and that presumes that it is ongoing, and "throwing it in for free" as long as we're managing the assets will not persuade our clients to value the advice we give as more important than anything we do.
I have felt this way for some time, but was concerned that clients would be unwilling to pay retainers for the advice. So I continued to charge a percentage of the assets I managed, and communicated that it was really a retainer for all of the services we offered. Unfortunately, if you are paid for the assets your clients will probably perceive that to be the most important service that you provide. Remember how we felt when the doctor wanted to get paid for the drugs and not his advice? About 18 months ago we implemented a flat retainer for all new clients, and we discovered that not only did they not object to paying us this way, they actually preferred it. One person told us that he always wanted to pay a flat fee but everyone he visited wanted to charge a percentage of assets. People crave conflict-free advice in this time of corporate corruption, conflicted analysts and mutual fund scandals, and a flat fee arrangement seems to be "just what the doctor ordered." More important, our clients' focus is on the total advice we give because that is what they are paying for. And we don't need to manage assets in order to get paid. If we encounter a business owner who has invested all of her money in her business but needs ongoing financial advice, we can accommodate her because we have no minimum investment amount in order to be a client.
A planner once asked me if I thought I should be paid more if my clients did well, and I answered that I did. He then asked how could that be done without charging a percentage of assets. I replied, "You just defined doing well as growing the portfolio. I define it differently. Doing well to me means that clients are reaching their goals, their money is aligned with their lives, they have peace of mind through volatile markets, they know that someone is looking out for their financial interests, and they have a relationship that is built on trust and not returns. Perhaps doing well was not agonizing over the 30-month market downturn from 2000 to 2002. I believe that we should be paid for what we can control. We have no control over the markets, and don't deserve huge increases when they do well, nor should we take a reduction in income when they don't. And all of my new clients agree with that.
Any time a group of financial planners get together, one of the subjects that seems to get discussed is how we can be recognized as a profession. My answer would be to start thinking of ourselves as professionals who understand and believe in the value of our advice-so much so that we are willing to charge reasonable fees for it. Most consumers perceive financial planning as "managing money," and we are partially to blame for that.
If we are serious about building this profession, we need to act as other professionals, and get paid for the value we bring to each relationship. We need to stop the practice of earning most of our money from the commodities we implement and begin getting paid for the wisdom and advice that we provide.
Roy Diliberto, CFP ([email protected]), is chairman and founder of RTD Financial Advisors Inc. in Philadelphia. He served as president of FPA in 2000, and regularly speaks to financial advisors on life planning.
Financiero.