Comprehensive, Fee-Only, Financial Planner Cost Justification
Comprehensive, Fee-Only, Financial Planners are some of the the most highly trained and knowledgeable professionals in the financial planning business. They provide advice in the six major financial areas that affect people’s daily lives. These planners must have the skill, knowledge and experience to understand how changes in one financial area effect decisions in the other disciplines. Many of these planners are members of National Association of Personal Financial Advisors (NAPFA). This is an industry association that requires all of their members to provide comprehensive financial planning, sell no products of any kind, and to refuse referrals fees or monies for revenue sharing or soft dollar arrangements. NAPFA members can only receive payment for fees charged their clients directly for the advice they provide. These requirements are designed to make member financial planners objective, transparent, and devoid of conflict of interest. NAPFA has the most rigorous criteria required of financial planners to qualify to become a member. These are the criteria:
- CERTIFIED FINANCIAL PLANNER™
- Submit a comprehensive financial plan for peer review
- Complete 3 years of comprehensive financial planning experience
- Provides comprehensive financial planning services
- Fee-only compensation
- Abide by NAPFA’s Code of Ethics
- Complete 60 hours of continuing education credits, with specific
- requirements for 6 core competency areas (per 2 year cycle)
CERTIFIED FINANCIAL PLANNER™
- Pass a 5 course educational program to be eligible to sit for the CFP® exam
- Pass a 2 day exam, which has a pass rate of ~57%
- Complete 3 years of financial planning experience
- Abide by the CFP Board’s Code of Ethics
- Complete 30 hours of continuing education credits (per 2 year cycle)
It is clear that these Financial Planners are unbelievably educated, trained, ethically conderned, and qualified. The question I want to address in this post is: are they worth the $185-$200 an hour they charge for their services?
Let’s put these fees in the context of other professions and then discuss the hard and soft dollar benefits of financial planning to determine if the value eclipses the cost of professional, fee only, financial planning. Let’s take a brief look at the cost and value of a few of other professions that individuals typically hire to provide services:
- Auto Repair Mechanic- Whether you use a dealership or a local, individually owned repair shop, you will pay $95-$110+ an hour for labor to get your car repaired. In addition, you will pay for the parts, lubricants and liquids needed to complete the job. The owner makes a good profit selling replacement parts. Some repair shops charge flat hourly rates for a standard repair job.. Example: Standard time to perform a brake job is 6 hours when it actually takes them 4 hours. You get charged for 6 hours. You are spending a lot of money to keep a depreciating asset working. Value: Being able to get to work etc. Necessity- little quantifiable return on money spent.
- Plumber- The hourly rate depends on the urgency of the situation. If you need a plumber in an emergency or can wait to be scheduled. The hourly charges on average ranges from $125-$200 an hour with typically a 2-3 hour minimum. They also sell products and parts such as hot water heaters or valves, etc. Value: Fix an emergency problem or an annoying leaky toilet or faucet. Necessity- little quantifiable return on money spent.
- Stockbroker, Insurance agent- If you have a broker or insurance agent, you are paying them commissions or fees through the Management Expense Ratio (MER) fees that either the mutual funds companies or the brokerage take directly out of your funds. On average, this is approximately 1.5% of invested assets annually. Insurance agents get paid commissions from the premiums that you pay. Value: Depends. Read my blog on passive investing. If your broker thinks he can beat the market, he is either ignorant or disingenuous, many academic studies over the years have dispelled the myth that investors or active portfolio managers can consistently beat benchmark market indexes. This is a needlessly expensive, unproductive way to invest for retail investors.
- Lawn Care Service- I find that many people spend a significant amount of money on lawn care. I estimate that they spend $70-$100 an hour for this service. Value: Beautiful lawn. Necessity- little quantifiable return on money spent.
- Accountant/CPA- National average $220 an hour. Value: Lower taxes, representation before the IRS if needed, other. Could be significant.
- Lawyer- $250-$500 an hour. Value: Representation before the courts and laws. Dependent on the issue addressed. Could be significant.
What are the benefits value of hiring a Comprehensive Fee-Only Financial Planner? Should every family make financial planning fees an important part of their annual budget? I will break down the benefits in each of the six financial disciplines that planners typically address. Below is a only a partial list of value and benefits that some clients have realized from comprehensive financial planning and are not applicable to every client. Every individual has a different financial situation and these benefits listed below may or may not apply to your individual circumstances. I would be glad to meet with you in a complementary initial meeting to better determine the value of Financial Planning in your situation.
These are a sample list of value and benefits that is possible to identify and derive from Financial Planning and execution:
- Cash Flow Analysis- What are necessary expenses and what are discretionary expenses that might be underutilized and reduced or eliminated? A financial planner can compare expenses, benchmark them against the market and determine if they are reasonable. Examples are cable television, insurance payments, lawn care services, cell phone bills etc. Reducing cost on any monthly recurring expense has a multiplier effect (12X) on the annual cost. Saving $200 a month in expenses has a big impact over time. If you save $200 a month and invest the savings for 25 years at 6% you would accumulate another $138,599 at the end of the time period before taxes.
- Debts and Assets- Understanding you debts, interest payments, recommended ratios for debt to income and your overall Net Worth allows a client to focus their cash flow on those areas that have the largest impact for reducing cost. Reducing high interest debt, student loan debt and understanding the effect interest payments have on your expenses can allow a clients along with a financial planner to structure a proper debt reduction strategy. If a client has $20,000 in 19% credit card debt, they pay a minimum payment of $100 a month for one year they will owe $22,838 at the end of one year. Putting together a successful plan to pay this debt down over two- three years could save this client approximately $60,000 to $75,000 in interest payments over ten years. Sound advice concerning a client’s mortgage choice can save huge amounts of money especially if we have rising interest rates and inflation in the future. If these conditions materialize, the proper mortgage choice could save a client tens of thousands of dollars in interest payments.
- Investments- Read my blog post on Passive Investing for a full explanation. If you have investments with a broker or an insurance agent, this is low hanging fruit for a client to save money. Brokerages and mutual fund companies on average charge approximately 1.5% in Management Expense Ratio (MER) or fees charged directly against investor funds. AFA provides two services to help clients manage their investment portfolios that can save a client significant amounts of money annually. If you have $500K in investable assets in your 401K and taxable accounts, AFA would charge $3,500 annually to provide you our Investment Mentoring Service. We actively monitor the portfolio and meet with clients either quarterly or semi-annually to discuss the portfolio, performance and rebalance the investments. The savings over the average broker managed portfolio is $4,000 annually ($7,500 broker fee- $3,500 AFA Investment Mentoring Service= $4000).
- Insurance Risk Management- Again this is low hanging fruit for cost savings. A Fee-Only Financial Planner can review all of your insurance policies and assess your overall risk. Aside from the soft cost of properly hedging and mitigating your risk, cost savings can be achieved by understanding these risk and only paying for insurance to mitigate risk that can’t be self funded. For instance, as you get closer to retirement and your retirement money accumulation target, the less life insurance you might need. A strategy to reduce the death benefit of life insurance policies as you get closer to retirement can reduce life insurance premiums. Auto insurance premiums vary widely from company and family circumstances. Recently a client saved $800 a year because one insurance company had lower rates for teen drivers than the client’s current company. I have seen client’s save 15-25% of their insurance premiums by having a planner evaluate and make effective recommendations.
- Retirement Planning- When do you want to retire, how do you envision your life in retirement, what changes do I need to make between now and then to achieve my goal. Knowing what part of your financial life needs to change and having the retirement goal as your motivation, will give you clarity about what is important to you in the present. The benefit of a retirement plan is clarity and commitment. What are you willing to forgo in the present to be able to fulfill your dream and goal of retirement. This will be motivation to find hard dollar savings to fund the achievement of the retirement goal.
- Tax Planning- Most CPA’s do a wonderful job of gathering your tax data and efficiently filing your income tax return. Most people do not have a professional who is pro-actively looking after their tax situation and making recommendations concerning strategies for reducing their income tax liability. A Comprehensive, Fee-Only Financial Planner makes recommendations that can reduce or defer taxes paid to the US and state governments. Investments should be held in the most tax efficient accounts. Any investment instrument that generates ordinary income, like bonds, are best held in a tax deferred account like an IRA or 401K. A well time Roth IRA conversion can save the client thousands of dollars in income taxes. E.g. If you started a business and had a Net Operating Loss in the tax year, this is a good time to perform a no or low income tax conversion to a Roth. Once the money is in a Roth it is never taxed again and doesn’t have a Required Minimum Distributions at 70 ½ years of age like a Traditional IRA.
- Estate Planning– A Financial Planner does not practice law but can help develop the best financial plan for a clients estate based on a client’s desires for the distribution of their assets when they pass from this world. Transferring assets from one individual or entity to others is a tricky difficult problem as individual state laws and federal tax law have jurisdiction over this process. Plans should be made in advance of a person’s death because if they aren’t state laws and local probate judges will determine many important decisions concerning your assets and responsibilities. In Georgia, if you die without a will or intestate, one third 1/3 of the estate goes to the wife and two thirds 2/3 goes to the children. If you have a child who is a minor a probate judge will appoint a guardian. With a will you can determine this in advance. If you have a large estate and younger children inherit a large sum of money, will they have the maturity to handle it in the way you would wish? If you die and your wife remarries a young stud muffin, will your children ever see any of your money as you might wish? You might want to consider a trust (QTIP) that handles your money the way you want. Estate planning can save loads of money from misappropriation.
A comprehensive financial plan and the resulting recommendations, executed properly can have a large, positive hard dollar impact on the life of the client. It is my belief that an good financial plan updates annually is essential for every person and family. In the examples I have shared in this post, I have given concrete hard dollar examples of how you can benefit from hiring a Comprehensive Fee-Only Financial Planner. A comprehensive plan cost between $2,100 and $5,000 depending upon your individual financial complexity. At AFA we derive this range of prices from how many consulting hours we estimate to complete the plan. Our experience has been that a well analyzed, customized, and constructed comprehensive plan generally takes between 12 and 27 hour to complete. This will be the best money you have or ever will spend to get not only a financial blueprint and roadmap for the future, but concretely developed, financial goals and tangible, significant cost savings in the short term. Call Aust Financial Advisory immediately to schedule a meeting to discuss your situation, and determine what value you can unlock from engaging us in developing for you a Comprehensive Financial Plan.