How We Charge- And Why

Todd Washburn Solutions (TWS), as you probably know, is a fee-only financial planning firm. We’re paid fees. Simple, isn’t it. But probably not very clear. “Fees” can mean different things, even between fee-only firms. Here’s an explanation of “fees” and how we charge for our services. Hopefully then it’ll be both simple and clear.

In the financial world the two main compensation systems are fees and commissions. Commissions are income paid to a person based on a product sale to a client. Typically the higher the cost, the higher the commission. The buyer doesn’t pay the commission directly. It’s built into the cost of the product. The commission is actually split between the company and the seller. A fee, on the other hand, is money paid by the client directly to the advisor or firm. It’s not based on the sale of a product.

Fees, even between different firms, can take different forms. Some will charge an hourly fee- like an attorney might. Others charge a flat fee like a house painter would. Still others, if they are providing investment advice, might charge a percentage of the value of the investment accounts. All these methods are considered “fees” by the regulatory agencies.

TWS has three primary compensation methods:

Hourly: This is reserved for situations where the work is expected to only take an hour or two of time. Maybe it’s a single meeting on a very specific matter. Or it might be a short meeting with some research. We’ve found that clients often don’t like the uncertainty of the cost. Also, they don’t like the clock ticking during meetings or calls. Sometimes they won’t even call- but should.

Flat Fee: We use this with our Self-Managed and Foundation services. At the beginning we’ll quote you our fee for the agreed-upon service. Youll know it and can plan for it. Will it ever change? It could- but it’s very rare. The main reason would be if something materially changed in the work we were being asked to do (i.e. an unexpected offer to sell your business and you wish our help). We feel flat fees benefit all involved. The client knows what he’ll be paying. There’s no reason not to meet or call. We can explore options as appropriate- without worrying about billing for a dead-end. We know from experience that no two engagements are alike. Something that takes a lot of time and effort for one client goes quickly with another. But something else will take longer. Usually things tend to balance out. If it all takes longer than anticipated- we didn’t do a good job of setting our fee. Our problem.

Flat fee based on Net Worth: Our Financial Life Planning (FLP) service fee is based on net worth. That’s a little unique. The most common fee-structure for an investment management engagement is the percentage-of-assets method. Most fee-only firms use it. It’s easily understood and relatively easy to calculate. It’s a fair method, and better than commissions. But it’s not without its problems. Some are logistical and some involve possible conflicts of interest. Our concerns with the assets-under-management (AUM) system are:

  • Account movement. Generally, for an advisor to be paid an AUM fee those assets need to reside at the advisor’s custodian or firm. Two concerns we have are:
    • Some large company retirement plans have extremely low investment expenses, lower than the advisor can access through their channels. It has to do with the share classes available. In this case, moving the account might mean higher costs for the client. To be fair, there may be other reasons to move the accounts- but this is one potential downside.
    • Some accounts might have special provisions that might be triggered, or lost, unfavorably for the client. For example, in NC, some older federal Thrift Savings Plan accounts have very favorable state taxation rules. Moving the money elsewhere potentially triggers taxes that otherwise wouldn’t be. But without moving it the advisor can’t get paid (and actually might not be allowed to advise on the account).
  • Reluctance to spend money. Most financial advisors really want to help their clients as best they can. But it’s also their livelihood. If they’re doing their job they’re earning their fee. Consider, though, this situation. An advisor manages a client’s investment portfolio, charging a percentage-of-asset fee. The client has a mortgage on a home. They really want to pay it off. As it turns out, they can afford to do so without jeopardizing their retirement plans. So it’s simple- pull the money out and pay off the mortgage. Right? Yes, and the advisor should recommend that. But just for a moment, look at it from the advisor’s side. When the funds are withdrawn and the mortgage paid off, the client is essentially the same financially. Their net worth (assets minus liabilities) hasn’t changed. They have fewer investment assets, but also less debt. But since the investment account is smaller, so is the advisor’s fee. Yet the advisor’s work-load hasn’t changed. She’s still doing what she has been, but she’s taken a permanent pay cut. I know- poor advisor. I’d like to think we’d all do the right thing no matter what- but it’s a difficult position to be put in.
  • Advisors can’t control the market. So should they get a raise when the market is lifting all boats? Likewise, is a pay cut warranted if a sinking market is pulling everything down? Yes, the advisor is responsible for the allocation and the specific investments in the accounts. And yes, he should be held accountable for the results. But, I’ll let you in on a little secret. Advisors work a whole heck-of-a-lot harder in down-markets than up-markets. They never worked so hard as during the 2008¬ 2009 downturn. They didn’t cause it and they couldn’t stop it. But the good ones were there for their clients and honestly suffered with them. They earned their fee and more then.

We understand you may not agree with all of the above. That’s OK. But you have to admit- they could influence how an advisor might act.

At TWS we take a different approach to fees in our Financial Life Planning service. Our fee is based on our client’s net worth. This addresses the above concerns.

  • Assets and accounts don’t have to be moved anywhere if that’s what makes the most sense.
  • Moving money from an investment account to pay off a mortgage? It doesn’t affect the net worth- it’s just money movement. Buy a vacation home? Same thing- moving assets. We have no reason not to recommend doing these things if it’s best for you.
  • We can’t control the market either. Instead, we lock our fee- for 3 years. At the end of the 3rd year we recalculate your net worth and adjust the fee accordingly.
    • As for how we set that fee- we have a chart. We see which bracket your net worth falls in and that’s the fee.

What we think is most important and valuable about doing it this way- by net worth- is that it puts our focus where it’s supposed to be. We tell our clients that the measure of wealth creation is an increase in net worth. It encompasses assets as well as liabilities (debt). Working with you to increase assets, decrease debt, or both, is the key to wealth. So our fee is based on the thing we ask you to focus on. With the AUM system the focus is on only one side of that equation. While we acknowledge no system is perfect- not even ours- we are trying.