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Building the Business 101: Settling on a Fee Structure

Through trial and error, two advisors find that retainer fees suit their business best.

Veena A. Kutler and Annette F. Simon, 10/05/2006

This monthly series of articles describes the many steps and occasional missteps we took in building our financial advisory business, Mosaic Wealth Management. Mosaic is a fee-only comprehensive financial planning and investment management firm located in Bethesda, Md., a suburb of Washington, D.C. At this writing, we have about $50 million under advisement, 40-plus clients, two employees, an 1,100-square-foot office suite in a Grade A building, and the two of us--Annette and Veena--the principals and equal owners of the firm.

Like so many aspects of our business, Mosaic's fee structure has evolved over time.  While we have always been firmly in the fee-only camp, we have at different times charged hourly fees, project fees, AUM fees, financial-planning fees, and annual retainer fees. Through trial and error, we think we've finally arrived at a fee structure that strikes a good balance: We provide real value to our clients while generating enough profit to grow our business and compensate ourselves for the time, stress, and risk inherent in building it.

Before Mosaic
In 1996, Annette hung out her shingle determined to create a business providing financial-planning services only, without investment management. Sheryl Garrett had not yet started the Garrett Planning Network and created a framework for building a practice providing hourly, as-needed advice to middle-income clients. Annette began with charging hourly fees and providing an estimate of how many hours a project would require at the outset. What she learned from the start was:

  • Financial planning takes a lot of time. Her time estimates were always low, often by a factor of three or four times.
  • Just a small proportion of the clients were interested in an ongoing relationship, so the only way to succeed was to continuously bring in new clients.
  • Clients usually needed an advisor to implement the investment strategy in order to achieve good results. However, Annette had never managed money; she was reluctant to do so when she had neither a CFA designation nor the on-the-job training earned by managing money during a variety of market cycles.

She experimented with "financial physicals"--a two-hour interactive planning session offered for a fixed fee. She tried to introduce an annual subscription fee, similar to an annual retainer. But in the end, Annette just couldn't come up with a formula for success in a planning-only, hourly fee business model.

Veena started Mosaic in 2000 with a very different model. Because Veena's experience was in portfolio management, Mosaic's primary service was investment management, and clients paid an assets-under-management fee for it. Veena recognized that individuals needed financial planning to make investment decisions suited to their needs and tolerance for risk. She provided these services at no additional charge to her clients.

As time went by, Veena saw that much of the ongoing service clients needed was related to financial-planning issues, rather than their portfolios. At times, there was no relationship between the fees clients paid and the service they required. Yet with no financial-planning experience and absent a CFP, Veena never felt comfortable charging a separate planning fee.

Unlike Annette's, Veena's solo practice was profitable almost from the start, but she found herself working harder than she ever had just to keep up with the needs of a small group of clients.

After the Union--Separate Fees
When we began working together, the two of us agreed to a fee structure that would reflect the multifaceted character of our service. Our structure called for an asset-management fee plus a financial-planning fee. After we developed client's initial financial plan in year one, the financial-planning fee would drop by 50%. We figured that the planning burden in the first year of the client relationship was much greater than in subsequent years.

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