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Hourly Financial Advice - The Right Model?

As an hourly-based planner and advisor, I often get laughed at by some of my peers. Here is a biased view of why I chose this fee model. To make it a little less biased, I turned to Sheryl Garrett, founder of the Garrett Planning Network, a group of 315 financial planners who primarily charge by the hour in the $180 - $240 per hour range. I am not a member of this network.

There are three main fee models - commissions, percentage of assets, and hourly. Here are some pros and cons of the hourly model from Sheryl herself.

Pros on hourly

  1. Fewer conflicts - Sheryl noted that the hourly model had less incentive to give a recommendation to benefit the advisor. For example, paying off a mortgage would mean less revenue for other fee models. Converting a 401K to an IRA also has more conflicts in the other models since more assets equals more fees or commissions.
  2. More flexibility - Sheryl stated hourly advisors can recommend any product, as opposed to other fee models that are limited to being within a certain platform. For example, why would a fiduciary have their client in a money market earning 0.05 percent when there are safe places to stash your cash earning 20 times the amount? Also, certain CDs like Ally Bank and Security Service have great rates that also protect against the bond bubble. The hourly model doesn't have the incentive to capture assets.
  3. Works for the little guy - Sheryl says the client doesn't have to have much money for the planner to be cost effective. The client may just need a couple of hours of advice and can be on their way, much in the same way they may need an attorney for one particular issue.
Cons on hourly
  1. Client won't seek advice - An argument for the percentage of assets model is that the client can call at any time without the clock running. They are not as likely to seek advice they may need if they are going to receive a bill for that call. I've also heard the criticism that hourly planners can over-bill their hours, though any fee model is vulnerable to fraud.
  2. Client won't implement - The argument here is that the other fee models give the advice and implement it. Hourly planners, including myself, give a written plan, discuss it with the client, but don't always get involved in the implementation.
  3. Not conducive to an ongoing relationship - People need ongoing advice from a long-term trusted advisor, rather than a one-time engagement.
Addressing these cons, Sheryl stated that there are truths to each of these, yet there are also ways to mitigate their impacts. For example, the client will keep calling if the hourly advisor is adding value. She notes that a good planner can make sure the implementation happens by either being involved or scheduling a follow up meeting post implementation. Sheryl went on to say that planners absolutely have ongoing relationships with clients and the hourly model doesn't preclude this. It's just that all consumers don't need it, in the same way she hopes to never need to have an attorney on retainer indefinitely.

My biased take
I obviously am writing from a biased viewpoint since I chose this hourly model myself. Still, I am aware that no fee model is perfect. Any time a dollar changes hands, there is always a conflict of interest between the client and the advisor. Further, we CFPs love to use the word "fiduciary," though actually being a fiduciary in practice is much harder than just saying it.

Irrespective of the fee model being charged, I recommend that every consumer trust their advisor enough to listen but never so much that they follow blindly. A rule of thumb for all consumers to follow is that if you can't explain your investments simply, you don't understand them. And if you don't understand them then you are probably transferring your wealth to your advisor.

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