Paying for Financial Advice on an A la Carte Basis

Smaller investors seeking financial advice often find themselves uncomfortably betwixt and between. They may not be able to meet the minimum asset levels that fee-only advisors employ; nor may their situations be complicated enough to warrant paying for advice on a percentage-of-assets basis. At the same time, they may not feel comfortable obtaining advice via a commission-based broker, particularly if he or she isn't required to adhere to a fiduciary standard.

One alternative business model for financial advice is the one employed at Garrett Planning Network, where clients pay for advice on an hourly, as-needed basis. Started by Sheryl Garrett in 2000, the network now has more than 300 member-advisors across the United States and overseas. I sat down with Garrett earlier this year to get her take on what to look for in a financial advisor, as well as her firm's business model and why she thinks it's so important that all advisors adhere to a fiduciary standard.

Let's start with the genesis of your firm. What prompted you to start Garrett Planning Network?
I started my financial-planning practice doing hourly as-needed, fee-only advice in 1998 after leaving a wealth-management partnership. My former firm was a comprehensive financial-planning firm, including portfolio management. We had one service, take it or leave it. My business partner and I found that we were attracting a lot of prospective clients but our model didn't really fit most of them. It was overkill, at a minimum. Sometimes it was grossly overkill.

So were you charging clients as a percentage of assets at that point?
We had to make it as complicated as possible. Literally, it took a worksheet to fill out, and it was convoluted. It was trying to represent the complexity of the case, but I don't think any formula works very well for that, and that's why I don't favor them. The fees that we charged or quoted to clients were based on their assets that we managed for them as well as earned income.

So to figure out what someone's charge was, sometimes the numbers came out really goofy. You might have a very high wage earner who hasn't accumulated much; they're just starting out in life and they have a very straightforward financial situation but just happen to make a lot of money. So the fee could be $15,000, but the amount of labor involved might really warrant $1,500. And sometimes the opposite would be the case, where the situation was very complex, maybe the individuals are selling a business or they're getting divorced. Those formulas don't fairly represent, in my view, the amount of labor and expertise needed, and potential liability to which the advisor is exposed.

I'm all about everybody paying their fair share, and I think charging by the hour is the closest way I can get there. If clients want gobs of my time, they would pay for it, and if they don't need me much they don't pay much. It's not that I think hiring advisors on retainer is philosophically flawed, it's that the majority of the end users doesn't need a retainer. Do you need an attorney on retainer? Let's hope not. But you do need an attorney periodically throughout your life. Sometimes it's for good things, like if you're adopting a child, and sometimes it's because your neighbor's tree fell on your fence. But there are always times when you turn to an attorney, certified public accountant, or consultant of some sort.

So I decided that why in the world, if the rest of the consultants in this country can charge by the hour, the project, their time, or advice, why can't financial advisors do that? And that was basically the beginning of my hourly practice and the network.

One of the most liberating things that accidentally happened was that clients started taking more responsibility. When I worked under retainer, clients occasionally would come in with boxes full of papers they hadn't even opened. They definitely hadn't filed them, they weren't in any semblance of organization.

And when I went on an hourly basis, a few people would actually bring in binders, and their stuff was under the right tabs. I found that clients started actually coming up with their own agendas. "Here's what we're thinking about, please give that some thought and let's plan to talk about it at our next meeting." So it was a really wonderful change.

How did you get the word out about your business?
I had a few pieces--news stories--in various industry publications. And Bob Veres did a profile in his newsletter Inside Information titled, "Walk-In Planning." That was one of the more significant introductions to how it was that I was working with clients. As I described my practice to him, he said, "It sounds like a dentist's office--the way they pay on the way out and schedule the next appointment." It's not nearly as painful but the dental analogy actually works quite well. The dental industry has helped us maintain good dental health because they train us to not let an ache or a chip or something like that turn into a massive pain.

And that's kind of my approach to working with clients on an hourly, as-needed basis. Once we get things organized, and if they're helping to keep them that way, then maintaining it shouldn't be all that complicated, unless they have a lot of significant changes in their lives. Checkup appointments, if you don't have any pain going on, are pretty harmless in terms of the time and energy involved as well as cost. But it does help to maintain your good fiscal health, to make sure you're not missing out on any good opportunities and you're continuing to plug away as you should.

One question I have is about the economics of your business, whether the typical advisor in your group has to have more clients to make this hourly model work for him or her. Is that the case?
Well, yes, but it requires a little explanation. When I was working with individual clients I had support staff, and we had worked together with about 400 client families. And I called them all clients even though I didn't have any ongoing responsibilities to those clients at the same time. So it was very much like the dental practice. My calendar became the controlling factor of who I could see and when. So I could look out on my calendar and see that three weeks from now I've got an opening so I could take an appointment at that point, but this week I'm completely swamped.

But as you alluded to, yes, in this type of hourly practice, you are working with more people with less revenues per household, on average, than you typically would with any other compensation structure. And that's one of those reasons why financial planners aren't just falling over themselves to do this.

Let's talk about how you vet the advisors in your group.
All the advisors are fee-only in our group. And as of Jan. 1, 2007, we instituted a new rule that any member coming into our group had to either already be a Certified Financial Planner or be a CFP candidate at the time. They have up to five years to obtain their CFP designation. There are other great financial-planning designations out there. However, I also think that it's in the client's or the public's best interest for our industry to embrace one for clarity purposes. And if we build upon one, it's better than saying, "Well there are five designations that one could have, and any of these would be OK." Over the years, the CFP designation has kind of bubbled to the top as being the premier designation.

Prospective members of our network also have to fill out an essay-type application that asks several questions, such as why do you want to do this, why are you going to be good at it, what do you want to target, what resources do you have as you're ramping up, and why are you attracted to this service model? Because it's a philosophical decision.

My philosophy is pretty well known by our prospective members, and they also participate on a biweekly virtual tour of our network. That gives us an opportunity to answer questions and visit with people. They might have specific questions about their situation. And then one of my staff members speaks with all of the prospective members individually.

And then they may or may not submit an application, and I review all of the applications. We verify licenses and designations, either now or in the past, and once they register as an investment advisor, we require copies of those documents. Then annually upon renewal, they have to resubmit those updated documents for review. So the screening process is designed to help us end up with those people who are philosophically aligned with what we stand for and our mission. That weeds out nearly anybody who is after things that are either unreasonable or against our ethics.

So the unreasonable would be, "I want to be up and running at full capacity in six months." Well, you need to get reasonable--it will take longer than that. And against our ethics would be, "Oh, and by the way, I run a hedge fund on the side that I'm going to put all of my clients in, or a mutual fund." Well, no, that's not being objective.

Why do you feel so strongly that all financial advisors should be fiduciaries?
It may be partly because of my Midwestern, middle-class naivete, but I just expect that when somebody has a position of trust and confidence with you, that you will give them your best guidance.

When I go to the doctor, and they say "Sheryl, this is what you need to do," I take it for granted that that is their professional judgment--that it is truly the best thing for me to do at this time based on the information they have.

Well, in real life, I've also found that clients of financial advisors presume the same thing. But here's the danger: The rules don't work that way! We have this presumption that we can rely on this advisor, but no we can't. It's caveat emptor with a broker or registered representative, for the most part. When it comes to the fiduciary standard, it all comes back to asking what does the client expect? What do they think they're getting, what kind of a relationship? When you spill your guts and all of your nitty-gritty details to someone who holds himself out as a financial counselor, or retirement specialist, or who knows what they call themselves, you might expect that person is a fiduciary.

But the real standard that a broker works under is the standard of suitability. And in my research trying to define what suitability means, all I can come up with is the word reasonable, or some variation of the world reasonable. Here in fiduciary land, you have to do what's best. In suitability land, you have to do something that's reasonable. And to me that's a big difference.

The other big difference is that with a suitability rule, the responsibility of proving whether the recommendation was suitable lies with the investor. But with a fiduciary, the responsibility that you did the right thing as the advisor stays with the fiduciary. The fiduciary is obligated to prove that they did what was in the client's best interest. Wouldn't you rather have that as the customer?

How should one go about finding an advisor?
When I'm talking about interviewing advisors, I equate it to online dating. Do some checking out of a potential date online. Chat with them online. Then schedule a telephone call, and if you're still intrigued by this person, you might send some additional questions, or set up a time to meet with them and interview them even more. I think that works really well for advisors or online dating. I have experience with both! I'm a big advocate of doing your initial investigation in stealth mode. Why expose yourself to somebody until you're ready and you've narrowed it down to someone you think is going to be potentially a good fit?

I have two acid-test questions on how to find an advisor. One of them is, "Are you a fiduciary?" If the advisor can't glowingly say yes, or write down yes, then there's your answer. Because their employer very likely won't allow them to say yes to that question unless it's true. If they hedge, "Yes, but," or "Well, it depends on the circumstance," I'm sorry but that's not good enough.

The second question is, "How and how much are you compensated?" For the majority of advisors, the rules are that we must tell you how we're compensated, but there's no rule that says you must tell how much you're compensated. That's for the majority of advisors. Fiduciary advisors do have to tell you the expenses, not just our compensation but all the expenses that are known or can be reasonably obtained. Brokers only have to tell you that they earn a commission or that they get paid fees and commissions.

Well, how can you compare apples to apples unless you know what you're going to get for a price that you're willing to pay? So I need a dollar amount. It's not really that there are evils in the compensation structure. It's that they're not clear, and we don't really know if we're paying our fair share or a heck of a lot more than that. So my major complaint with compensation structures is lack of fairness and transparency.

See More Articles by Christine Benz

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