How Much Should Unbiased Financial Advice Cost?

October 29, 2009 by TFB

How many times have you heard "before you make any big money decisions, check with your own financial advisor"? NPR's Marketplace Money program says that all the time. It can't be taken at face value because it assumes that everyone has a financial advisor.

I've never had a financial advisor. I'm guessing the percentage of the population who have a financial advisor isn't that high. If they all say people should check with their financial advisor, why don't most people have one?

1. Too many sharks. For those who have a financial advisor, I'm guessing again that most are not working with a fee-only advisor who acts as a fiduciary and only gives advice in the best interest of the client.

There are many salesmen and saleswomen out there selling expensive products to unsuspecting clients. Advisors who work in bank branches and "full service" brokerage firms are notorious for this. Ameriprise advisors don't have a good reputation either. When people can't tell an unbiased advisor from a salesman/woman, they are afraid of getting burned. They end up not using an advisor at all.

2. Too expensive. If people are not paying the advisor through expensive products, a fee-only advisor can still be expensive.

Some will take you only if you let them manage your investments and pay them 1% of your assets. Some won't take you at all if you don't have at least a six-figure minimum asset level. 1% on $100k is $1,000 a year. 1% on $500k is $5,000 a year. And that's just for investment. There's much more to financial advice than just investment.

3. Easy to DIY. If you set your mind on it, it's not that hard to learn about these financial planning topics, although the same can be said of almost anything: plumbing, exercising, lawn care, you name it.

You can educate yourself by reading books, newspapers, magazines, and now blogs, listening to radio programs, and watching TV and video. You can Google or get on Internet forums and message boards and get all kinds of information.

You have the same problem with not being able to separate the good from the bad if you don't know much about the subject to begin with. You still have to be able to apply what you read or heard to your own situation. By definition the books, radio and TV programs, blogs and Internet forums can only be generic. Thus the "check with your own financial advisor" CYA disclaimer.

For the most part, people are on their own. If news media reports are representative of what's happening in the real world, people on average are not doing a very good job at managing their finances. I would think we will be better off if we can get unbiased advice at an affordable price. The price paid for doing it right will be recovered many times over by avoiding costly mistakes. Still, given that there are many sharks out there and even good advice can be expensive, DIY seems to be the only viable alternative.

How much should unbiased financial advice cost? Suppose I convince you that you can trust me for giving you good quality, unbiased, individualized financial advice. What do you think should be a fair price?

Let's get specific. Suppose a couple want to save for college for a child. They want to know which account type (UGMA, Coverdell, 529, Savings Bonds, Roth IRA, regular taxable, etc.) they should use, which provider, and which investment options they should choose. What do you think they should pay? $0 because people can just Google? $5? $25? $100? $200? $500?

If you have a trusted advisor to whom you can ask unlimited number of questions and get advice whenever you need it, how much should it cost? $0? $10 a month? $20 a month? $50? $100? $200? $500?

I ask these questions not just as a hypothetical. I'm willing to help others with their personal finance questions. If I start giving individualized advice though, I'll have to become a licensed advisor and maybe get a CFP. I don't necessarily have to make much money from it (my full-time job covers my living expenses), but I do want to at least cover my cost of regulatory compliance and liability insurance. However, if people are not willing to pay much for such advice, obviously there's no point of getting licensed and certified and paying the associated costs.

So do you think there is an under-served market for unbiased financial advice? I can think of some friends and family members who can use some advice if it doesn't cost an arm and a leg.

Usually an under-served market exists when there is a big gap between what customers are willing to pay and what it costs to produce what they want. I suspect that's the case in the financial advice market.

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Comments

12 Comments on How Much Should Unbiased Financial Advice Cost?

  1. Mike Piper on October 29, 2009 | permalink
    2.  

    Great question. One I've been pondering lately as well.

    I can't say from a customer perspective how much it should cost. But from a "how much are others charging?" perspective, you might want to look for the websites of planners in the Garrett network. From what I hear, they do mostly hourly and "fee for project" type of work.

    Example: Dylan Ross is a CFP (in the Garrett Network) who frequently comments on my blog. You can find his rates here: http://www.swanfinancialplanning.com/solutions.html

  2. Aaron on October 29, 2009 | permalink
    3.  

    A lot of fee-only financial planners will charge hourly for advice. The trick is to find a fee-only guy or gal who is not so "up market" they will still talk with you. Hourly rates vary with region and experience, just like lawyers. But I'd expect anywhere from $75 to $250. Retainers usually are done as a percentage of assets, but that percentage tends to go down with the amount under management.

    Also, interview them BEFORE you engage them. Make sure you are comfortable with them, their practice, and how they view their clients. You also want to know they already have a good head start on your problem. It's much easier to drop an advisor and move on before you pay them money.

  3. Don on October 29, 2009 | permalink
    4.  

    I asked a guy locally and he quoted me $100/hr. That was exactly what I thought I would charge in the same circumstances in our area. In the end I haven't made an appointment though.

  4. Geoff on October 29, 2009 | permalink
    5.  

    Here are my musings on this topic with lots of gross generalizations, so take it for what it's worth.

    I think the biggest problem is that the people who need advice the most are more easily taken by salesmen and brokers. For 2 reasons:

    1. They tell them what the client wants to hear, "I can make you 20% a year" or "All my stuff always beats the market" yada yada yada
    2. Their fees are hidden, oftentimes embedded in their products – there's a behavioral element in that people scoff at paying $200/hr for anything but they won't hesitate to buy funds with 5% front end loads (they don't realize the true costs)

    On the other hand, people who are not likely to be taken by salesmen are usually those who can spend some time on google / boglehead's forum / etc., sort out the good from the bad, and do it themselves.

    So your market for clients as a honest fee-only advisor is limited. Either you have to convince those in the first group that they're being lied to and paying too much for subpar performance (something they're not going to want to hear) or you have to find those in the second group that are either too busy to do it themselves or who would rather spend their time doing other things and are willing to pay for your advice.

  5. Bill Winterberg on October 29, 2009 | permalink
    6.  

    The folks over at MyFinancialAdvice.com have tacked your question and provided a solution through it's group of advisors who abide by fiduciary practice standards.

    Many offer fee-only advice and have reasonable per-hour rates as well as project and retainer options.

    http://www.myfinancialadvice.com

  6. Daddy Dub on October 29, 2009 | permalink
    7.  

    I think an hourly rate of $125 is very reasonable for financial advice from a professional. I have considered a service offering similar to yours and concluded that it would have to be a side gig until I had enough rolling in to make a living at it. The roadblocks to success are many. In every networking meeting I attend, there are usually at least 10 financial advisors out "beating the bushes" for a lead.

  7. Pelon on November 1, 2009 | permalink
    8.  

    "Usually an under-served market exists when there is a big gap between what customers are willing to pay and what it costs to produce what they want. I suspect that's the case in the financial advice market."

    That's it in a nutshell. The market for people willing to spend $75 – $250 per hour is extremely small compared to the number of people who need financial advice. I'm in a similar situation to you. I have a full time job that I have no intention of leaving anytime soon, but I'd like to start a side business selling financial advice. The people I'm most interested in helping are middle income folks who have a household income from 25 – 100k. If you tell them that you are going to charge them $75 per hour, they will laugh and walk away. With this demographic, you probably can't get much more than $25 per hour. If you have to pay a lot for licensing and certifications, that rate may make it difficult to break even. Luckily, my state has no licensing requirements for financial advisers so that is less of a concern for me.

    $25 per hour isn't enough if someone needs a complex estate plan, creative tax plan, or similar advanced help. The vast majority of the market doesn't need those things, though. They need simpler help like how to invest in their 401k, what mortgage to pick, and how to save for college. I think $25 per hour is reasonable for that type of help.

  8. Aaron on November 1, 2009 | permalink
    9.  

    Most states do not have registration requirements for small advisory firms who give investment advice (registered investment advisors), but they do have requirements for the individuals who work at those firms (investment advisor representatives). This usually consists of passing your series 63 and 65, or passing your series 66 and 7 tests, or holding certain professional designations like CFP, CFA, or ChFC.

    This all sounds confusing and bureaucratic, and it is to some degree. But it is a good idea to have some formalized background before giving advice. Even if you disagree with certain philosophical stances of the education, at least you will have a foundation to express those differences.

    -former investment advisor representative

  9. Dylan on November 2, 2009 | permalink
    10.  

    Folks can combine the second and third points (too expensive and easy to DIY) to make advice more affordable by only paying for the advice they need. The more you can figure out on your own, the less you'll have to spend on help. Also, if you are knowledgeable about the subject matter and a good note taker, you may not want to pay for the additional time to have the adviser write up a summary.

    It's usually more important to find out how much you answers will cost then what the hourly rate is. How long it takes an adviser to deliver advice varies as much as hourly rates do. Also, you want to be sure that there is not another line of compensation in the background creating a bias. There are a lot of advisers that charge a fee for advice and tow the "unbiased" line but also receive referral fees, commissions, and other payments based on the advice. You might pay less per hour and be advised toward actions that end up costing you more.

    Pelon: "Luckily, my state has no licensing requirements for financial advisers so that is less of a concern for me.

    Aaron: "Most states do not have registration requirements for small advisory firms who give investment advice (registered investment advisors)."

    I'm only aware of one such state, Wyoming, but advisory firms in that state are required to register federally with the SEC. Also series 7, 63, are specific to sales and distribution not advice.

    Annual costs to maintain registrations, licenses, certifications are not extreme. If you are advising people about their finances, you'll want professional liability insurance, and that can be expensive. It's not so much a question of whether you'll do something wrong; it's more a question of whether someone might try to blame you anyway.

  10. TG on November 4, 2009 | permalink
    11.  

    Bill, could you let me know if http://www.myfinancialadvice.com lets me specify the location of the advisor? I was not able to locate a link for that.
    For that matter, how do I locate a trustworthy advisor in my city? I am in Indiana.

  11. Beans on November 4, 2009 | permalink
    12.  

    We never had a financial advisor. We are the DIY type. But I do a lot of reading but some time it is hard to sort through the solid stuff vs the tip of the moment stuff. So, yeah, we would pay for a financial advisor who we can trust. May be $75-100/hr. I would expect that we need the advisor for may be 2 hrs?

  12. John D. Buerger, CFP® on November 18, 2009 | permalink
    13.  

    A number of excellent comments on this thread. Geoff is correct, the people who really need sound advice are the ones most likely to fall for the sales pitch and buy the products they don't need and can't afford.

    Others speak about the "cost effectiveness" of paying a $200/hr fee for financial advice when your income is only $50k per year (which above the median household income in America, BTW).

    THE COST SHOULD BE WHATEVER GIVES THE CLIENT THE BEST VALUE IN RETURN. If I can improve your investment returns by 7%, then paying me 1% has value. If you spend $500 on my advice and you end up $2000 richer at the end of the day, there is a return value to you … even if that $500 was for only 10 minutes of my time.

    It isn't the price you pay that matters … it is the value you receive in return for whatever you pay. This rule applies to every time you spend your money – you want to maximize the value you get for whatever price you pay.

    The challenge with all of this is that sound, useful and valuable financial advice concerns a lot more than just your investment account (which most people in that $50k income range don't have) … but most financial advisors focus ONLY in the investment realm. The reasons for this limitation? it is easier to demonstrate "value" in return for their fees on investment advice, especially when we're talking about large sums of money under management.

    Cash Flow management is the most powerful wealth-building tool for most average Americans, but it has been hard to build a viable practice (where the advisor can afford to stay in business) on Cash Flow management advice when nobody had perfected a way of monetizing (being paid for) that advice.

    But even if the hourly rate is very high, there is GREAT VALUE for Cash Flow Management advice … EVEN for an average household income.

    Example – a person spends two hours with an advisor in my firm working though our Cash Flow Hydrant Process (which teaches a different way of looking at the money you're spending and how you are spending it). On average, that person will immediately improve their Cash Flow (by cutting expenses) by 5% of their overall income (our objective is 10%, but that can take a year or two of work). On $50k of income, that means an additional $2000 going towards savings in the first year alone (after all fees have been subtracted). The fee for this service is $500 and a few hours of your time. That is an 400+% return on your investment in year one. Not bad.

    Meanwhile, if that same person spent $500 for two hours of my time and I did nothing to help them save money or build wealth in any way (which is more common with salespeople and investment … then I charged too much for my advice and would be just another small part of a very big problem.

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