On recent episodes of You’re a Financial Planner, Now What? we’ve talked a lot about compensation models. In some financial planning circles, the conversation centers mostly on fee-based and fee-only advising, but as you’re about to hear from our latest guest, there’s quite a few more models to choose from.
In this episode, we talk to Kara Beth Vance, CFP®, Senior Advisor at hourly planning firm, Timothy Financial Counsel in Wheaton, IL. She shares in the ins and outs of the hourly financial planning model and how it works within her firm so you can “try it on for size.”
How hourly financial planning works
After leaving an AUM fee-only firm, Kara Beth took a position with Timothy Financial Counsel, an hourly financial planning firm. While this model is becoming more and more common in the profession, many of you out there may be unfamiliar with the concept and how it works in a firm setting. In this episode, Kara Beth goes in-depth on what the hourly planning world looks like, how Timothy Financial structures client “tiers” based on complexity and advice needs, and how advisors like herself work.
At Timothy Financial, the standard hourly rate starts at $280 currently and ranges up to $400. Based on client needs and, again, complexity, initial plans alone can range from $4,000 to over $8,000. And while that may seem steep, the reality is that AUM, fee-only firms often make 1%, which can be upwards of $10,000 a year depending on the client. With their hourly fee model, Timothy Financial advisors offer “tiers” of advice to their clients, based on four areas.
The four areas of advice and “service creep”
As Kara Beth explained in this interview, Timothy Financial’s team offers different hourly rates based on a client’s particular situation. After the initial meeting, the advisors will determine the “tier” at which to place the client, which is usually advised on their needs for:
- Cash flow and retirement counsel
- Investment analysis
- Risk management
- Estate planning, counsel, and design
For example, a younger, single individual who only needs cash flow and investment analysis would be on a lower tier than an older married couple who are seeking all four forms of advice. Kara Beth’s firm has policies in place that guide which tier to place a client, but it’s also highly unique to Timothy Financial’s overall goals.
One thing their specific tiers and proposals do: prevent service creep. In many AUM, fee-only, and fee-based firms, it’s easy to “eat money” when a client needs something that falls out of scope or takes longer than anticipated. With an hourly model, advisors are compensated for their time. Of course, Timothy FInancial does offer proposals for the initial plan and, if certain elements aren’t considered or trouble arises, it is possible to lose money. But in general, Kara Beth finds that the hourly planning model offers a ton of benefits — to the firm, to the advisors, and to the client most of all
Pros and cons of the hourly planning model
The biggest benefit to the hourly planning model, Kara Beth says, is that “clients see what they’re getting.” When they’re paying for an hourly service, clients know exactly how each of those hours are spent and at the end of it, they are happy with how they’ve spent their money. Clients of Timothy Financial also benefit from a team approach: instead of competing for fee-based commissions, the hourly team at Timothy Financial works together to create a plan and manage clients together. This means that each expert in their own “arena” can put in their two cents on a client plan, they can bounce ideas off each other, and the competitiveness sometimes found in other firms is reduced.
The one downside, Kara Beth admits, is a limited ability to be proactive. Because you are billing hourly, you’re working on a client’s plan or advice needs when the need arises. In instances like the 2018 tax change, this meant a client’s plan could change and it would affect the overall approach — one that was proposed in the initial meeting. Overall, though, Kara Beth and her team find that the hourly financial planning model encourages clients to be more engaged in their financial plan, and that it creates a much more impactful environment for everyone.
If you want to hear how Kara Beth and her firm, Timothy Financial Counsel, have found success with the hourly financial planning model, check out this episode! There are some great tactical tips, as well as insights into how a new breed of firm is thriving in the profession.
What You’ll Learn:
- Kara Beth’s background in AUM fee-based services
- How her firm, Timothy Financial Counsel, is serving untapped communities with hourly financial planning services
- The differences between fee models and how they impact clients
- How client case complexity guides compensation models
- The four areas of advice and how to prevent “service creep”
- Best practices if you’re interested in implementing an hourly fee model
- How hourly fees benefit planners and clients
- The potential downsides to hourly financial planning
- Why a “team approach” in an hourly model eliminates competition and improves clients’ plans
In this episode with Kara Beth Vance, CFP®, we talk about:
- Her firm, Timothy Financial Counsel
- Timothy Financial founder, Mark Berg and the team of advisors
- RSUs - restricted stock units
Interested in following Kara Beth? You can connect with her on LinkedIn.