Mark Berg: Hourly Financial Planning Is 'A Vast Blue Ocean'

Our guest on the podcast today is Mark Berg. He is the founder of and lead advisor at Timothy Financial Counsel, which is an hourly financial planning firm that he started in 2000. Prior to launching Timothy Financial, Berg served as a client manager at a fee-only financial planning firm and has provided fee-only financial guidance since 1995. He holds a bachelor’s degree in economics from Wheaton College and is a certified financial planner practitioner and is registered with the National Association of Personal Financial Advisors. He served on the national board of directors for NAPFA from 2008 through 2011. Timothy Financial is the firm that Christine Benz and her husband use for financial planning, and a member of Jeff Ptak’s family is a Timothy Financial client as well.

Background

Bio

Timothy Financial Counsel

“Scaling Up to $1.4M of Revenue With (Only) Hourly Financial Planning Fees With Mark Berg,” by Michael Kitces, Financial Advisor Success podcast, March 20, 2018.

Influences

Garrett Planning Network

“Voices: Sheryl Garrett, on the Evolution of a Planning Firm,” Thomas Coyle, The Wall Street Journal, Dec. 31, 2009.

“Sheryl Garrett: ‘The Industry Thought I Was Nuts,’” The Long View podcast, Morningstar.com, July 17, 2019.

Tax Planning/Direct Indexing

“An Inside Look at Direct Indexing,” by Danny Noonan, Morningstar.com, March 23, 2023.

“Could Direct Indexing Lower Your Taxes?” by John Rekenthaler, Morningstar.com, March 27, 2023.

“4 Questions About Direct Indexing,” by Sheryl Rowling, Morningstar.com, Oct. 24, 2022.

Retirement

“What Is the ‘Retirement Spending Smile’?” by Wade Pfau, Retirement Researcher.

Resources

Michael Kitces

Financial Planning Association

The National Association of Personal Financial Advisors (NAPFA)

Other

Morningstar Investment Conference 2023

If you’re looking for even more investing insights, data, and analysis, join us at this year’s Morningstar Investment Conference, April 25 through 27 in Chicago. We have a great agenda this year, featuring top financial minds from market gurus like Liz Ann Sonders to great investors like Steve Romick to retirement planning experts like Mary Beth Franklin and Dr. Laura Carstensen. There is something for everyone looking to tackle the challenges and opportunities for investors in the current market. We’re in-person only this year. So, check out the link in our show notes to register. We’re looking forward to seeing you in Chicago.

(Please stay tuned for important disclosure information at the conclusion of this episode.)

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is Mark Berg. Mark is the founder of and lead advisor at Timothy Financial Counsel, which is an hourly financial planning firm that he started in 2000. Prior to launching Timothy Financial, Mark served as a client manager at a fee-only financial planning firm and has provided fee-only financial guidance since 1995. He holds a bachelor’s degree in economics from Wheaton College and is a certified financial planner practitioner and NAPFA-registered financial advisor. He served on the national board of directors for the National Association of Personal Financial Advisors from 2008 through 2011. In the spirit of full disclosure, Timothy Financial is the firm that my husband and I use for financial planning and a member of Jeff’s family is a Timothy client as well.

Mark, welcome to The Long View.

Mark Berg: Thank you. It’s great to be here.

Benz: Well, it’s great to have you here. We want to start by talking a little bit about your background. Can you talk about how you got started in this industry?

Berg: About 28 years ago now, I was fortunate to be hired by a fee-only wealth management firm, a large national firm, and I worked with them for six years. So, that was my introduction to the industry.

Benz: What were your main motivations in striking out on your own and starting up Timothy Financial Counsel? Also, can you talk about what your vision was for the firm? What you wanted it to look like?

Berg: That was quite a journey. I was very happy at my old firm. It’s a really, really good firm, still around today. But I found that we would often get calls from people that didn’t fit our profile. And that firm’s profile was to work with high-income, high-net-worth delegators, very common target for fee-only wealth management firms. And we get people who either didn’t meet the minimum, so we’re on a less complex, built less wealth, side of the equation or what’s often termed as the millionaire next door—people who are more self-directed in general but looking for an independent third-party perspective on decisions they had made as it related to their personal finance.

So, I would say out of 10 calls in a given period of time, only two fit the demographic that the firm was looking for from a clientele perspective and eight were outside of that. So, often after having that initial conversation, they would say, “Well, if you’re not a good fit, who would you recommend?” So, that really set me on a journey, probably a three-year journey, of trying to find a good fit. I was unsuccessful. Really everyone in my world, the fee-only world, really wanted to work with the same clients, and outside of that it was more commission-driven and I just wasn’t comfortable, and they weren’t looking for that service level. So, I got to a point where I realized no one is interested in serving this unmet group. It was actually through reading an article that was written on Sheryl Garrett about the hourly model. She was, as I recall, recommending it as a potential add-on to an existing firm in order to meet Middle America. But I thought, wow, that’s just such a great model that could make a whole lot of sense. So, that was really the genesis of Timothy Financial that was back in 2000.

Ptak: And for those interested, we actually interviewed Sheryl—I think it was back in July of 2019. So, you can learn more about Sheryl and what she has done by going to our back catalogs. Wanted to talk about your business model. Timothy charges its clients an hourly fee versus a charge based on their assets under management. A lot of advisors will say that’s a difficult way to build a business because you don’t have that stream of income that client portfolios throw off, so to speak. Why did you decide to go that route?

Berg: Yeah, that’s a good question. So, first of all, starting a business is hard period, whether you’re doing it hourly or assets under management. As you know from the statistics, there’s a high percentage of businesses that fail after the first five years. So, this was a bit of an unknown. But I did compare to starting a CPA practice, starting a law firm practice, and there were many in our community that I knew that had done that and done so successfully on an hourly basis. I actually found, personally, that because of the flexibility of the hourly model, it actually afforded to a quicker startup, because whether they were more middle income or more mass affluent or high net worth, the hourly was an attractive and a different model. So, we found success very quickly within the first—well, we were profitable in year one and year two I hired my first colleague. And we had a great—relative to my assumptions for the first three years—we hit the year-two goal in year one and we blew away our year-three goal in year two. So, it was a lot better than we anticipated.

Benz: I’m wondering when you’re hiring people—and it appears that the firm has been growing quite a bit—do you get that reservation from them? Are they worried coming into the firm that they may be constantly in that client-acquisition mode because you are hourly?

Berg: Yeah. All firms in the first couple of years are looking to add new clients. So, that’s a very typical issue that all of us have to deal with, anybody who is starting a company. But again, I found that the attractiveness and the flexibility of the model really gave us, I think, an advantage, to be honest, to move more quickly. And because it is so distinct and unique, I think that has created the opposite in the sense that I’ve never really felt like I’ve had to sell what we do. I feel like really all we’re doing is explaining our model relative to other models that they are already familiar with. And it’s an easy description because they’re already used to it in the concept of an attorney, CPA, therapist—really all other professions charge by the hour. So, it’s an easy transition. We were finding, and still find, that our close rate of prospects to clients is right in that 80% to 90%. So, it really, within a reasonable period of time, just became a nonissue. I would say as far as hiring colleagues are concerned, I think as is typical, the owner is concerned about all the time, but for employees, it’s a little bit of a less concern. I don’t know that any of my colleagues have ever said, “Hey, are we OK? Are we going to make it?” Even in those early years. But yeah, that at least has been our experience.

Ptak: Your firm tends to keep a pretty low profile on social media and in other outlets where we see some advisory firms being more prominent. What’s your thinking on that front?

Berg: I think it’s just a function of time. It’s always trying to figure out that time trade-off. I’ll give you a different example, but you’ll see how it parallels. I used to get called quite frequently to do charity golf outings, and I’d be treated by so and so. And there was a point early on that I realized this is five hours of my time to go on this golf outing. Is it worth five hours times my hourly rates and is the trade-off there? I think you can apply that to really any circumstance. That’s one of the benefits of doing a time-based model, is it allows you to think critically, and I think better. So, when it comes to social media, I think we can all attest that social media can be really a bottomless pit. So, you have to look at what is your return on your time investments, and I have not found that social media is worth that. We try to keep our profiles updated so that when they go on LinkedIn or on NAPFA with a planner profile, as an example, that they’re seeing a current picture, they’re seeing current information. But beyond that, we don’t spend a lot of time on social media. I would say additionally, it’s been a number of years since we’ve really needed to have a high profile from a client-acquisition perspective because we get a regular stream even though we’re not very active in social media of prospects. So, that just hasn’t been a priority for us.

Benz: Some hourly advisors offer ongoing portfolio management as an add-on for clients who want that. But you’re adamant that you don’t want to manage client assets. Can you talk about your thinking on that front?

Berg: I’m a little biased in this, I’ll admit. I’ve had the benefits of doing all the different models at various stages in my career—the assets under management, the retainer, and hourly. I’ve not done commission. I guess I have found, specifically with the assets under management, that assets under management is a jealous mistress. It really needs a lot of attention to do it well. When you’re looking at asset management, it brings in a whole other level of regulatory oversights, that requires a lot more software, it requires you to keep up at a whole different level, and it really does change, from my vantage point, the whole advisor-planner relationship with the clients.

I really want to be viewed as the financial planner for my client, not the asset manager. And I feel that if I charge, whether it’s AUM or a retainer, for my services, it will change the relationship. Because the focus goes from planning long term, which I think all advisors would agree with, to that shorter term just by its very nature of the quarterly, the semiannual, the annual performance, and benchmarks, and all of that. It’s not like those aren’t important, but it’s a question of what is the focus. I feel that there is a massive demand out there for hourly-only service. I think there’s still plenty of demand for whether it’s retainer or an AUM model. But we are in a vast blue ocean, and I think that that’s going to be there for decades to come. We don’t feel that pricing pressure. There’s not others coming in like the Betterments of the world that are lowering fees, lowering fees, lowering fees. We just don’t feel that pressure at all. So, I feel the focus is important. We’ll put the assets under management fee model aside. But even on the retainer, as I’ve talked to other hourly practitioners who charge a retainer for their services, I’ve often asked, so do you track your time when you do that? And the answer so far has just been no. They just do it on this retainer basis based on some formula. Again, I think there’s a discipline and a mindset to hourly that once you do it, you’re all in and that really dictates the, I feel, best practice for those that really are committed to the hourly approach.

Ptak: It seems like one big consideration with a firm like yours where you don’t actually manage the client assets is that clients may not do what you tell them to do. They may just get busy or feel overwhelmed by the logistics of the test. Do you see much of that, and how do you help clients overcome it?

Berg: That’s a great question. I would say that used to be an issue. But I think I was more of the problem than the client, the reason being, early on I had bought into a lot of myths that my friends in the advisory world were telling me that my hourly practice should be, and I found over time that those myths are not true. One of them was when we early on would give advice in the investment world, we’d say, here’s our recommendations. Let us know if you need any help. So, it was more of an opt-in mentality that will help you if you ask for it. But we’ve actually flipped that and what we’ve realized is the clients are really seeking it. What I mean by that is, after we’ve given our recommendations for rebalancing or loss harvesting or whatever the recommendations that we’ve given in the context of the overall planning, we will often say: if you like, we have a client service team that will hold your hand through the process. They will go online with you. They will walk through each of the steps. They will not keep account numbers and passwords. That’s all on them. Any actual trade, the submit, we will not do, but we can help them with everything else, and we do. I would say the vast majority of our clients, even our do-it-yourselfer clients, really love that service. It’s not a big time-taker, therefore not a big cost, and it provides a tremendous amount of value to them. So, we have found because of that the clients are happier and obviously, they’re following through on doing the transactions. That’s been a real shift in our mentality, which has become a shift in actual clients following through. So, used to be an issue, really very little of an issue anymore.

Benz: I want to stick with the behavioral side of things. We sometimes hear from advisors that they add a lot of value in the realm of what they might call client behavior management, helping them stay the course with their investment portfolios in a year like 2022. Do you think that’s a potential disadvantage with your business model that you don’t manage the assets, so you can’t really control what your clients ultimately do with their investments and if they might be governed by some of these forces that aren’t ultimately positive for the health of their plans?

Berg: Yeah, that’s interesting. We have found with our clients—and we, just like every financial advisor at least that I know, we develop a relationship with our clients, and it’s a relationship based on trust. Our clients—it’s a very, very small, I can’t even come up with three names over 22 years of clients that just acted on their own and did something that was bad behavior because the market was going down or whatever—they call us. That’s what we’re here for. And again, we’ve built that relationship of trust, such that we don’t see hardly any of that bad behavior because that’s what we’re here for, that’s why they’ve engaged our services. We are not a pick-up-and-put-back-down type of relationship. We are ongoing, regular relationship, not really any different than an assets under management that does comprehensive financial planning or a retainer that does comprehensive planning. We meet with our clients regularly. We exchange emails. We exchange calls. When times are tough, if our clients need it, we will hold their hand and help them usually through the planning side of things, help them get the right perspective as it relates to the investments and how they’re doing and how that interfaces with the rest of their financial picture.

So, I would agree that part of the advisor’s role is to help against bad behavior, but that actually stretches well beyond just investments and making a bad choice. There’s all kinds of decisions that our clients make, no matter what our model, is that we have to help them through—buying a timeshare, buying too much of a house, making commitments they can’t follow through on. So, our model, I feel, works exceedingly well for our clients to help them avoid bad behavior across the board.

Ptak: How about older clients who may be concerned they won’t always be able to manage their own portfolios or don’t want to? Could a case be made that they’re better served by an AUM-based advisor who might provide that kind of ongoing oversight? Or would an hourly firm like Timothy be a fit for them too?

Berg: That’s going to be a case-by-case circumstance. We’ve got clients in their 70s, their 80s, their 90s, that love the way we do business, and we enjoy working with them. So, I don’t think that that is a barrier. But certainly, if somebody is a true delegator, who is saying … We consider ourselves more of a partner with our clients as opposed to becoming their CFO. Our clients really are seeking that mutual partnership; we’re working together toward a goal as opposed to taking over their financial circumstance. So, for those who are saying, “I don’t really need to know anything. You just take care of everything. I’m going to do my thing,”—that’s great for somebody who is more of an asset under management-based approach. But in our case, it’s always planning-centric. So, we always advise within the context of planning. And on the implementation or whatnot, as I said, our client service team is phenomenal and really can, in a very, very short period of time, help them make any changes that are necessary.

Technology has really become our friend. I don’t know that I could have done hourly planning 30 years ago. I just think that the technology, the web has really changed everything and provided us with the tools, and we see that continuing to evolve. A lot of the things that we would have at my old firm considered our value-add, what we can do that others can’t, it’s become automated, it’s become accessible, and that trend continues. We see it right now in direct index that 20 years ago there was only the Parametrics and maybe a few others that would do that direct index approach, and now we see Schwab, Vanguard, Fidelity all coming out with their own retail, very low cost, and we think that that will continue to be the case. So, hourly fits really well within these changing times.

Benz: I’m curious, you mentioned direct indexing. Is that a concept that you’re enthusiastic about and are there clients for whom you would suggest that that’s the right way for them to go?

Berg: The answer is yes. We’ve been recommending direct indexing for quite some time, well before it became popular, but really only for certain clients. So, if you went on our website, you would find that we have several different types of clients. We have people who are just getting started, really pretty straightforward financial circumstance, and they would not be candidates for a direct index approach right now. Typically, a lot of their money is in their 401(k). So, that would make sense. But as you take steps along the complexity curve, we find that until recently for us a level 4, level 5 complexity client, which would be a high-net-worth, ultra-high-net-worth client, from a translation standpoint within our industry, really have benefited from the direct indexing approach.

I’ll use an actual example from last week. One of my clients, who is ultra-high-net-worth CEO said, “I’d like to do some charitable giving.” Contacted his direct index provider, said we’d like $300,000 of your highest appreciated long-term holdings. They generated it same day. We sent a wire for the same amount, which they then repurchased those stocks. And then, we moved those highly appreciated stocks into their donor-advised fund. So, that transparency, being able to get inside the index very, very powerful. And last year because the markets were down, a lot of loss harvesting took place that benefited him from a tax standpoint because he had some capital gains from private equity. So, we found it to be very valuable at the high-net-worth, ultra-high-net-worth from a tax, even cost perspective, getting tax alpha. In fact, just last week, I contacted Fidelity to get more information on their new retail direct index to see if this is something that we should look at. They are offering, I think, it’s a $5,000 minimum, 40 basis points, which is higher than what we’re able to get now for a level 4 and level 5, but it is that lower threshold. It’s something that we’re exploring. So, yeah, I think that there’s some unique opportunities that could be explored on that.

Ptak: Would you say that tax planning is the key area where your firm consistently adds value for your clients? Or is that too big a generalization?

Berg: Taxes, they’re just prevalent all around us. Our goal with all of our clients, a goal that all of our clients express to us is, if I can avoid taxes, obviously not evade taxes, but if I can avoid taxes, that would be optimal. So, whether it’s cash flow planning, whether it’s within the investment context, even in the estate planning, taxes is a big player. I would say that while it is a generalization, that is a big driver for clients and for us in our advice.

Benz: I know it’s probably hard to generalize, but can you concentrate on what tax issues that you would characterize as low-hanging fruit when you work with clients’ issues that you see again and again that are fairly straightforward to address?

Berg: There are a handful and sometimes, it’s state by state. But the IRS has done an admirable job from the IRS’s vantage point in closing a lot of loopholes that used to be there. But from a typical taxpayer’s perspective, if you have upcoming college-age students looking at 529s to see if there’s deductions available there, sometimes there is a state-credit opportunity. We’ve got that here in the state of Illinois. That’s been very, very powerful from a tax-planning standpoint. Charitable giving is huge. For any client who has charitable intent, whether it’s now or even in their estate, there’s tremendous opportunities to save quite a bit from a tax standpoint. So, we often will explore that. Obviously, employee benefits, whether it’s looking at HRA, HSA, using HSAs as a savings vehicle for future retirement, health-related costs is certainly an opportunity, Roth versus traditional and the 401(k). So, there’s plenty of options still available to individuals. But it’s not a one-size-fits-all. You have to look at each circumstance uniquely. Financial planning is not boilerplate, or if it is, it shouldn’t be because I can’t think of any two clients that are the same. Even if they’re in the same profession or same demographic or ZIP code, they’re still different. So, we treat them accordingly.

Ptak: I think that one of the areas where you have a lot of expertise is helping people with employer stock like restricted stock. Obviously, those situations are all really different, but are there any thoughts you can share on managing these assets, how much is too much, that sort of thing?

Berg: Part of it is education. I think a lot of individuals don’t fully understand what RSUs really are and how they play into their near-term and long-term financial picture. So, some simple examples would be there are many clients that over the years we’ve said, you realize that when RSUs vest and you pay the tax, if you convert the units into the shares of the stock, you are making a conscious decision, the same as if they gave you cash and then you wrote a check or you did a wire and you repurchased your own company stock, because taxes are now completely out of the picture. You’ve already paid all of the gain. And a lot of times people don’t understand that. They think that there’s some kind of tax benefit to maintaining those units, and there isn’t. So, that’s part of the initial education. And then, we’ll go into concentration. We’ll look at how much concentration do they have within their overall portfolio in their own company stock and then we’ll talk about how they already have concentration risk and the fact that it’s their employer and get to what they feel is an appropriate level of exposure to their own company. And then, that brings us into diversification and so on and so on.

RSUs play an important role for compensation for people. So, we just look at it really as variable comp as opposed to an investment per se to manage in that regard. One of the most powerful ways that we’ve helped clients in the past with RSUs, who also have a deferred comp plan, is to basically use the RSU income to replace their personal income and then use that personal income to fund their deferred-comp plan. And then, we use the deferred-comp plan to be a bridge in retirement from an income, stretching out their paycheck longer. So, it’s a powerful tool, lots of opportunities, few pitfalls that you have to be aware of. But in general, RSUs are great and it’s a great way to tie them to their company. But when the vestings happen, the opportunities open up.

Benz: Mark, I wanted to ask about the complexion of your client base. You’ve alluded to the fact that it’s really quite diverse. But can you talk about whether you see any commonalities in terms of the age bands that are attracted to the firm and also the assets that people have in their portfolios? I think there’s this thought that hourly is going to be best suited for people who don’t have a lot in assets. But can you address those two things, age and asset level?

Berg: On the age, we used to track, probably for a decade, we tracked our client demographics pretty closely. Interestingly, we broke it into age 25 to 40, 40 to 50, 50 to 65, and then 65 plus. What we found as we looked at our clientele is it was literally almost 25% in each of those categories. So, there was a real nice diversity of age, which we like here at our firm. We like that diversity. There hasn’t been a proclivity toward one end or the other. I know at my former firm, we typically got 50s plus. It was more that tail end. They had already done their accumulation. They were nearing retirement or a liquidity stage. But because hourly isn’t based on assets, we don’t have that restriction. So, age-wise, we continue to see a really nice diversity of clients.

Then as far as assets, I think, was the second part of your question, we don’t really track that to be honest because it really has no bearing whatsoever as it relates to our service model. The driving force for us is complexity. And there is an element where assets and complexity can, there can be some correlation, but sometimes it’s not at all. Sometimes our most complex clients are actually fairly modest. They just have a complex circumstance. Maybe they bought a bunch of annuities in the past that need to be worked through, or maybe they’re just high needs, lots of client communication. On the other end, you may have somebody we just started serving our client that has $120 million in cash. Well, cash is actually pretty easy to work with. So, there’s other issues obviously that we’re going to need to deal with. From an asset standpoint, again, we have clients just out of college that probably have negative net worths because of school debt or whatever, maybe they’re one of our clients’ kids, for example, just getting started. We love working with people who are just getting started. And that we would put in our, what we call, our level 1 complexity. And then, it goes all the way to our level 5 complexity, which I would say—and this is a little bit dated; I think I need to update this—but I would say our net worth, if you were to ask for an average or a median, I used to say $20 million. I think that’s actually closer to $50 million. But again, I don’t really track it all that closely. But just as I think through our clientele, I think that’s a safer bet. And that continues to move.

I’ve actually found the opposite. That was one of many myths that I had to work through because I had assumed the same because that’s what I was told: hourly is going to be attractive to the middle income. What I found is actually the opposite. Not that they weren’t attracted, but that the mass affluent, the high-net-worth, ultra-high-net-worth, because the fees are so high with a $5 million or a $10 million portfolio, they just don’t see the value translation. And you’ve heard this around the industry. Actually, I’ll give you a story.

A year ago, a client of mine had a liquidity event. They netted about $120 million. And I see they’re still working in the business. And I said, you may want to have management at this time. You just aren’t at a point that we can partner. So, let’s find somebody for you. And they thought that was a great idea. So, we did actually a national search and I was just hired by the hour to help them through the process and be the translator and the negotiator, and we found a really good solution for them. One of the questions that unfortunately sometimes they even tipped that I was going to ask this question in advance because they love the question so much. I would say, OK, my client has got $120 million. I put it through your calculator and you’re going to charge $0.5 million a year, or whatever, for service. My client is going to probably have a second exit about the same amount in three to five years. Help me understand how the value is increasing with the fee that you’re charging. Because they were already at the highest, highest point in everybody’s fee calculation model. So, it was essentially a doubling of cost. And they had already promised the world to these clients as far as the estate, this and that and the other. And there was silence on the other end. So, high-net-worth, ultra-high-net-worth, they get that. They understand that. And they see hourly, and they love the flexibility. If I use you more, I’ll get charged more. If I use you less, I’ll be charged less. They’re already used to that with their attorney. They’re already used to that with their CPA. So, it’s an easy translation. From a net-worth standpoint, we continue to see the whole gamut. I think on the ultra-high-net-worth, we’ve just continued to see that grow and not because we seek it; we don’t. We’re actually very poor marketers. We just answer the phone. That’s been our marketing strategy for a number of years and so far it’s worked OK.

Ptak: We wanted to shift gears and ask you about retirement. One life stage, when even dedicated do-it-yourself types might benefit from working with the planner, is as they approach retirement. If someone comes to Timothy and would like advice about whether they’re on track to retire, about how many hours would that take and what’s a typical all-in fee for that sort of planning?

Berg: That’s a great question. That’s a common question. If you go on our website, you’ll see we don’t hide anything. So, you’ll see all our hourly rates are right on the website. And under the “fees” tab, which is right at the top, it goes through level 1, 2, 3, 4, 5, gives a range. So, level 1, it will say usually between 10 and 20 hours; level 2, usually between 12 and 25 hours; level 3, between 25 and 30 hours; level 4, between 25 and 40 hours; level 5, usually 40 hours or more. So, that’s our starting point as far as range is concerned. But then, when we meet with the individual, we gather quite a bit of data, just like any full-service financial planning firm would do, and we firm it up to an actual number. Sometimes it’s just on that retirement question. Other times, we’re also looking at their risk management issues or their state issues or the investments. It’s really up to the client.

I should say, we do not do investments only. So, if somebody wants to hire us for investments only, we are not the fit. There are, I’m sure, other firms that are willing to do that, but we will not do investments outside of financial planning. To us, that’s the value. So, that’s our perspective.

So, you multiply that hour times the advisor’s rate. I’d say that the majority of our advisors are at $350 an hour. Our partners are at $450 an hour. And then, there’s me, and I’m the exception. The reason why I’m the exception is I really don’t have time. But at the same time, I’m a softy. It’s hard for me to say no. So, what we did as kind of a go-between was we just kept increasing my hourly rate to get to a point where it would really have to be exceptional for somebody want to engage my personal time because I’m really fully booked with my clients. So, I’m at $800 an hour. We found that’s been enough of a deterrent for most people to hire one of my colleagues. I’ve got an unbelievable team that I am privileged to work with. So, it’s usually based on, again, their knowledge curve as to whether they’re working with level 1, level 2. So, we really try to match where their competency is and where the client is at, and that will determine the cost. So, level 1 for full-service planning could be $3,000 or $4,000. Level 2 could get up in the $5,000, $6,000, $7,000. Level 3, and it just ratchets up from there. But the client is not saying I’m a level 2; we are saying, based on your information this is your complexity, which translates to level 2 or 3 or whatnot. So, it’s a very transparent process.

Benz: Sticking with retirement planning and people who are on the cusp of retirement, one perennially hot topic in that area is safe withdrawal rates, how much someone can safely withdraw from their portfolio per year through retirement. How does your firm approach that question, helping people set their sustainable withdrawal rates?

Berg: That’s a great question. There’s so many things that come into play with that decision. What level of fixed income they have coming in from, say, Social Security or a pension or a combination, obviously their lifestyle, their portfolio mix, taxable versus tax-deferred or tax-free. But I would say that more often than not with the type of person that’s attracted to hourly, we are finding that we’re typically more encouraging spending than discouraging spending. Meaning, they’re living so within their means that their withdrawal rate is 1% or 2% or 3%. And especially, as they’re aging into their 70s and 80s, their spending levels, actually, their draw rate typically is actually leveling out, if not declining. So, we feel that 3% to 4%-ish percent range in the younger end of retirement with some exceptions and then, it creeps up over time, has worked well. I think that originally the Bengen studies and some supported it. Then it seemed to fall off, and now it’s back. But that 4% to 5% range seems to be sustainable. Obviously, with the inflation question right now, we’ll see how that all plays out. But we do a lot of income replacement planning for our clients as they near retirement and then all through retirement and making sure, in a tax-efficient manner, we can meet all of their lifestyle needs.

Ptak: We also wanted to ask you what you’ve observed when it comes to retiree spending patterns. Our former colleague David Blanchett has popularized the notion of the retirement spending smile. His point being that spending isn’t this straight line, that it varies over the course of retirement. What have you observed in practice in working with retirees?

Berg: I have observed the same. I think I, again early in my career, took that lineal approach and that compounding expense approach too seriously. What I have seen is, from retirement until, let’s say, mid- to upper 70s, right around there, that is the sweet spot where they still have, for the most part, they have their health, and this affords them the ability to travel and to do things that they maybe didn’t do as much or even at all that they could do in that first phase of retirement. I have found myself, especially over the last 10 years, really encouraging clients to enjoy. We obviously do it within planning and make sure that we’re staying within a level that’s sustainable.

One couple always comes to mind with this topic where they were the truest definition, they were the living definition of depression-era mentality. They had passive income streams from pensions and Social Security that covered all of their expenses. So, they had this pretty good-sized portfolio that was basically one large emergency fund, and they had no dependents. So, there wasn’t even somebody that they could or were interested in passing along to. It took me probably three years to convince them it’s OK, you can spend. And I was ended up being actually pretty forceful in my recommendations, especially one of the spouses was so fearful. They took their first trip, came back, they were different people. And it has been a joy each year as we set a budget for enjoying a lifetime of earning. Now their health is getting to a point where they can’t travel, hardly at all anymore, and they’re right in that time frame that I had mentioned. And that’s when you see a transition.

That next phase, people think, well, medical expenses are going to get more. Well, Medicare actually handles a lot of that, and their expenses pretty much flattened out. They’re basically the same number year over year. Now there might be a change in categories. Maybe more in medical-related, out-of-pocket or whatnot, but less in a lot of the other categories and especially the discretionary categories—eating out, travel, clothing, and so on. We see that flatten it out. And then, typically, you may see a change if they’re needing some care of some sort. So, that will obviously change the equation. But we’ve definitely seen that expenses do vary by circumstance. And that’s why when people have the impression that retirement planning, once you get into retirement, it’s basically on autopilot. We would wholeheartedly disagree from experience, meaning as we’re meeting with clients on a very regular basis and seeing how their life is being managed on a year-to-year basis, it requires staying on top of things, because the circumstance can change on a dime. So, I would agree with the research that’s being done, that it is not just this lineal perspective. It’s a very dynamic issue that needs to be managed.

Benz: You touched briefly on long-term care, how some clients encounter a long-term-care need later in life. And this could be a whole podcast unto itself. But how do you address long-term-care risks for clients who are younger like in their 50s? What’s your preferred prescription on that front?

Berg: I would say just like any risk management, insurance is, you are looking to share the risk of a potential outcome with an insurer, whether it’s life insurance, long-term care, disability, and so on. And long-term-care need is still an if not a when, but more and more we’re seeing people are living longer and not being able to do those activities of daily living. So, we typically start by stress-testing the plan. What we’ll do is look up current statistics on duration and costs to their specific area and see is it affordable? But then, we’ll talk about what are their goals? Because they may say, well, I really want to make sure that I leave a certain amount of legacy, and a prolonged long-term care could affect that. So, that comes into play.

The cost of long-term care is not insignificant. That’s the other side, is looking at can they afford what long-term care cost? In the past, we used to be able to control that with a 1 pay or a 5 pay or a 10 pay, and that locks in the cost and the benefit. The insurance companies for a variety of reasons have moved away largely from those products and you’re just dealing with not only the annual cost increase, but sometimes pretty dramatic increases in cost over time or a change in benefit where you have to give up a cost-of-living adjustment or decrease the coverage.

So, most often with our clients, I would say, we look at long-term care for those that it does make sense to purchase as not a replacement, but just another stream. So, we’ll look at, OK, you’re already bringing in Social Security, you’re already spending X amount through your RMDs and through withdrawals in your portfolio, and what we’re trying to ensure is the above and beyond, the unexpected and the duration. Instead of maybe buying a $350-a-day with cost-of-living increase, which can be for, let’s say, unlimited benefit, which is going to be a very sizable premium, we may look at $100 a day and maybe instead of unlimited, maybe it’s a five-year or a higher, call it, deductible, meaning that there’s a longer period before you start receiving the benefit to help manage the cost and fit it within the structure of their overall financial plan. So, it’s definitely one of the topics that needs to be discussed.

Then there’s the client’s own persuasions as it relates to insurance. Some people avoid insurance at all costs. Other people are very, very comfortable and see it as a great tool to manage risks or fears or concerns that they have. So, as we’ve been saying all along, financial planning is not one-size-fits-all. You really have to customize it to that client and their specific circumstance and their mentality. That’s the approach that we take it with our clients.

Ptak: What are your go-to resources for staying current on financial planning and tax matters?

Berg: That’s a great question. There’s so many now that you have access to. Michael Kitces is—I don’t know how the man sleeps—obviously, has quite a staff now that just produces an amazing amount of volume of resources as it relates to any change, SECURE Act 2.0, whatnot and how that would play into potential planning opportunities. Online gives a lot of resources. Morningstar has great resources. We also find that conferences are often where you’re going to see how they may apply within the context of an overall financial plan. So, whether it’s NAPFA or FPA, or some of the wirehouses have their own conferences. There’s a lot of good offerings out there. Obviously, Morningstar has got one as well that you can stay current pretty easily these days. It used to be a much bigger lift where you’re having to get a copy, a paper copy of the act and then translate it and see how it works in. A lot of the software now is very quick in incorporating these changes into the planning software to make it easier and even adding modules to help you analyze aspects of it much better. So, those are some of the resources that we use at Timothy Financial.

Benz: Well, Mark, this has been a really fascinating conversation. Thank you so much for taking time out of your busy schedule to be with us today.

Berg: Oh, it’s my pleasure. Thanks for inviting me.

Ptak: Thank you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. While this guest may license or offer products and services of Morningstar and its affiliates, unless otherwise stated, he/she is not affiliated with Morningstar and its affiliates. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)