In my last blog, I addressed a listener question. With today’s entry, I’d like to answer another question. Although similar to last week’s question, this one looks at the cost of hiring a comprehensive financial planner from a different angle. As you read through this entry, you will learn what comprehensive financial planning actually entails, as well as the average cost of hiring a comprehensive financial planner. Whether you’re just beginning to think about hiring a financial planner, or you’ve used one for years, this entry will provide you with some valuable food for thought.
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Just the other day, I had a friend ask me, “Justin, how much does it cost to hire a comprehensive financial planner?” I kind of chuckled to myself before answering because I knew that just because it seemed like a straightforward question, doesn’t mean there is a straightforward answer. In fact, very few things in the world of finance are really straightforward. Oftentimes, people think they’re receiving “comprehensive” financial planning but, in reality, are just being given projections designed to sell them a product, strategy, or document that they don’t really need.
For example, I have a client who is a very successful business owner. They are in the final stages of their exit strategy and hope to be retiring later this year. But, when they first came to me, they had a very complicated tax strategy in place. The strategy had been put in place by a financial advisor with a large firm in another state. Candidly, it worked. They used a tax strategy that is often reserved for larger companies and made it fit a “mom and pop” operation. The problem was that they used this strategy as a means to sell the couple a very expensive life insurance policy, tax-filing and accounting packages, and a legal package. This couple was paying around $65,000 per year for products that they didn’t need.
Unfortunately, this happens more often than it should. But that’s not what true comprehensive financial planning is all about. When you’re hiring a comprehensive financial planner, you want someone who will look at your investments, marketable securities, stocks, and bonds. However, you also want someone who will look at your real estate (ROI, after-tax yield, etc.), your business (capitalization rate, hurdle rate, etc.), and all other investments and assets you might have. That is comprehensive financial planning. You need someone who will look at your total financial picture and create plans that direct each asset class to work with and for your unique financial goals.
Beyond simply creating investment strategies and managing assets, a truly comprehensive financial planner takes other factors into account. They should look at your cash flow. Comprehensive financial planners should look at where your money is going, including how you’re getting paid. I recently encountered a business owner who was taxed as an LLC Partnership, receiving payment as a W-2 employee. That’s not how that structure should work. By hiring a comprehensive financial planner to examine your total financial picture, you could avoid mishaps like this.
Additionally, a comprehensive planner should actively work to manage your risk. There are plenty of financial planners who act as glorified insurance agents, selling life and disability policies. Those are important to have (in some cases), but what about home and auto insurance? What about company-specific risk? Comprehensive financial planners work to mitigate risk in all areas of your life because the lower your risk, the greater your value can grow.
Still yet, comprehensive financial planning involves retirement planning. Each case is different but when will you begin receiving benefits? How does your health impact them? What will your taxes look like when you’ve retired? You see, anyone could look at your current financial picture and calculate how much more you’ll need to retire. All you would need is a calculator. But that’s not planning. True comprehensive planning deals with the total package. Beyond what I’ve already mentioned, your financial planner should be helping you with plans for education, your estate, and even increasing inflationary rates.
Now, I’d like to shift gears for a moment. The term, “financial planner,” has been tossed around a lot over the past several years. You’ve likely heard several variations of the term that range from financial advisor to wealth manager. However, a financial planner—in my eyes—is someone who acts as a fiduciary. They do whatever is in your best interest. Please, don’t get this confused with suitability. What’s the difference? I’m glad you asked.
Let’s pretend you need to purchase a coffee cup. When you approach me about needing a coffee cup, I might ask a few questions. What are you going to do with the cup? How long do you need the coffee to stay hot? Based on your answers, I would then provide you with a list of widely varying coffee cups to choose from. I could have anything from an insulated coffee tumbler to a styrofoam cup on that list. All of them would be suitable but they might not be what’s best for your needs.
On the other hand, if I’m acting as a fiduciary, I’m going to spend a lot of time trying to find out exactly what you need. In this case, I’d ask you if you needed the cup to be insulated. Does it need to be spill-proof? What environment will you use it in? Should it be silent (I actually had a coffee tumbler that made a popping sound when it opened and scared off a turkey that I was hunting)? Eventually, I’m going to find the perfect coffee cup for you. Suitable vs. what’s best. That’s the difference between a financial planner and a fiduciary.
Back in 2017, Michael Kitces of Kitces.com conducted a study that showed a variation of cost. What he found was that a client with a net worth of around $250K would pay about $1,400 in planning fees. Now, I know that some of you have a significantly greater net worth than that. I’ve included the corresponding informational graphics from the study, so you can get an idea of what your fees might have been at the time of the survey.
However, that information was gathered back in 2017 and things have changed a bit since then. Now, we have a few different models of fees with varying levels of comprehensiveness. For instance, the retainer model allows you to pay a predetermined fee for services. Such models can range from as little as $660 to $17,500, depending on the depth of planning.
Additionally, there are hourly-rate models. I know planners who charge as little as $200 per hour if they’re dealing with an area of planning that they’re not as experienced in. On the other hand, I’ve known planners that charge $2,000 per hour if they’re experts in a particular area.
Finally, you may have heard of Robo-advisors. These are essentially algorithmic programs to help you manage your investments. These can be a very affordable option, however, they’re not likely to offer truly comprehensive financial planning. When it comes to financial planning, you want a plan that has been handcrafted specifically for you. You probably won’t find the perfect fit just hanging on the rack. You need a tailored fit. But you will have to pay for it.
Perhaps you’re reading this and thinking, “Justin, I’m not really ready for business help just yet. I’m more interested in basic personal financial planning.” Oftentimes, this is known as “next-gen planning.” If this is you, you can probably count on paying roughly $250 per hour. That’s your average basic fee for a CFP® these days. For that price, you’ll get the basics, how and where to start saving, budgeting and cash flow strategies, etc.
Okay, what if I need a little more help? Well, as your complexity increases, your fees will also increase. At this point, you may be considering saving for your children to go to college, retirement planning, and having the basic framework for making your financial decisions. For this level of comprehensiveness, you could expect average fees of about $3,000 to $6,000 per year. As you get into investing, inheritance, or other windfall situations, the complexity of your financial situation continues to increase. Each stage requires further comprehensive planning, therefore, you could quickly find yourself hiring a comprehensive financial planner for an average of $7,500 to $12,000 per year.
Yet, this still doesn’t quite reach the level of complexity for most small business owners. As a business owner, you likely have an extraordinarily complex financial life. You may have multiple sources of compensation, extreme tax sensitivity, a large estate, multiple complicated insurance policies, and perhaps, you’ve participated in some deferred compensations over the years. You might have a short window to build your business for a sale before you retire. This requires intensive comprehensive financial planning. On average, you could expect to pay $18,000 or more for this level of service.
Why would you pay so much? The great philosopher, Plato, once said, “Better to be unborn than untaught, for ignorance is the root of misfortune.” Simply put, you’re not working with a novice. You don’t have to fear what you don’t know because you’ll be working with an expert. At that level of service, you’re dealing with someone like myself; someone with multiple credentials and over 20 years of experience. My challenge to you is to hire the best comprehensive financial planner that you can afford. A fiduciary with that level of experience and expertise should be able to present their fees to you as savings, meaning that their cost could be a net neutral to your lifestyle.
Friends, don’t let the seemingly large cost of hiring a comprehensive financial planner scare you away. Instead, look at the cost analysis and realize the value that you could receive from a good comprehensive fiduciary. Look, I know life is hard but life is good. Hiring a comprehensive financial planner can be frustrating, but the value that they could add to your financial life isn’t. With this guide, a little patience, and due diligence, you can make hiring a comprehensive financial planner at least financially simple.
Is your financial planner worth their fees? Are they truly comprehensive? Do they act as a fiduciary? If you answered no to any of these questions, reach out to us. The team at Financially Simple has helped hundreds of small business owners reach their financial and business goals!