Comparing The Cost of Financial Planning
Hourly vs. Fee Based
When it comes to seeking financial advice, understanding how professionals get compensated is crucial. Two common compensation models in the world of finance are the hourly financial planner and the asset-based fee charged by investment advisers. In this blog post, we'll explore the key differences between these approaches and illustrate how they can impact your financial well-being with real-world examples.
Hourly Financial Planner:
An hourly financial planner charges clients based on the time spent providing advice and guidance. This model is similar to how you would pay an accountant or lawyer for their services. Let's say you engage an hourly financial planner for 5 hours each year, who charges $250 per hour.
Example 1: A Client with a $150,000 Portfolio
If you have a $150,000 investment portfolio and you consult with the hourly financial planner for five hours over the course of a year, your total cost would be:
$250 (hourly rate) x 5 (hours) = $1,250
In this scenario, you pay $1,250 for tailored financial advice, regardless of the size of your portfolio. This makes hourly financial planning a cost-effective choice for individuals with smaller investments.
Asset-Based Adviser:
On the other hand, many investment advisers charge fees based on the total assets they manage for you. This fee is typically a percentage of your portfolio's value. Let's consider a situation where an adviser charges a 2% fee for a client with a $150,000 portfolio and a 0.75% fee for a client with a $1,500,000 portfolio.
Example 2: A Client with a $150,000 Portfolio
For a $150,000 portfolio, a 2% fee would amount to:
$150,000 x 2% = $3,000 annually
In this case, the client pays a substantial $3,000 fee to the adviser, which can significantly eat into their investment returns.
Example 3: A Client with a $1,500,000 Portfolio
For a $1,500,000 portfolio, a 0.75% fee would amount to:
$1,500,000 x 0.75% = $11,250 annually
While the fee as a percentage may be lower for the larger portfolio, the client still pays a substantial $11,250 in fees annually. This demonstrates that as your portfolio grows, so does the cost associated with asset-based advisers.
Comparing Costs:
Now, let's compare the costs of these two models for 5 hours worth of service for the client with a $150,000 portfolio:
Hourly Financial Planner: $1,250 per year
Asset-Based Advisor: $3,000 per year
The hourly financial planner proves to be significantly more cost-effective for the client in this scenario.
The Value of an Hourly Financial Planner:
With an hourly financial planner, you have greater control over your costs. You pay for the time and expertise you need, ensuring that you're getting value for your money. Additionally, hourly planners have no incentive to encourage you to invest more simply to increase their fees. They are focused on providing advice that aligns with your financial goals.
In conclusion, the choice between an hourly financial planner and an asset-based advisor should be made based on your individual circumstances and financial goals. However, for individuals with smaller portfolios or those who value cost transparency, an hourly financial planner charging $250 an hour can be a cost-effective alternative, allowing you to get tailored financial advice without breaking the bank. Remember, when it comes to your finances, informed decisions can make all the difference in your long-term financial success.
