Why Charging Separately for Financial Planning and Investment Management Makes Sense

5 min read
June 25, 2014

If you charge a client a fee based on assets under management, your perceived value is measured solely by the investment performance of that account. Are you comfortable with that?

I know I’m not, because the value I bring to the table goes far beyond investment management. Sure, this area is important for the long-term growth of client portfolios, yet helping clients with their personal finances is about so much more than that.

Creating an Example Outside of Financial Planning

Let’s say you hire a travel planner. We’ll call her Mary for this example. Mary was referred to you by your friend John, because she did such a great job for him. Not only did she find him great flight and hotel deals, but she also spent the time understanding the bigger picture.

Initially, John had no idea where he wanted to go... all he knew was that he was long overdue for a memorable trip. In the initial consultation, Mary asked many questions about John’s past experience with travel, the activities he enjoyed most, and the food he liked to eat. She went into detail about his travel budget, the length of his ideal trip and even the climate he desired.

After carefully analyzing the information that John had given her, Mary suggested that John go to France. It was exactly what he described and she thought he’d love it.

“I’m thrilled,” said John, at the end of the final meeting. “I can’t wait to go. I do have one question though. How do I pay you for all your wonderful advice?”

“That’s a great question,” said Mary. “One of the biggest factors of the success of the trip will be the weather, so it’s pretty simple. You’ll pay me based on the percentage of sunny days that you have. We planned this trip out for the best time to travel to France. Historically, the weather is outstanding during this time of year, and I’m confident that you’ll have many beautiful days to work with!”

Does that sound ridiculous to you? Mary just provided John with an incredible service that he wouldn’t find anywhere else. She took the time to get to know him and support him throughout the entire process, down to the smallest details. She genuinely cared about helping him, and used her expertise and years of experience to create an incredible trip.

And, then she took all the emphasis off the comprehensive planning that she provided him and put it all on the weather.

How do you think John will remember her if he gets 10 days of rain in France? He’s going to blame her for the poor performance in the weather, because she based the cost of her services on the outcome of that one area.

Think of it this way: The focus goes to where the money flows.

This made up scenario is eerily similar to how many financial planners charge for their services. They are outstanding at their craft. They can help clients plan for an infinite number of life situations that they might find themselves in, providing support for retirement, insurance needs, cash flow and goal planning, funding for college, buying a home, charitable giving... and the list goes on.

Yet, the payment they receive is not based on any of that. It’s simply a derivative of the total amount of investable assets the client holds with the firm.

Financial Planning and Investment Management Are Two Distinct Services

It’s no wonder that when you introduce yourself to someone as a financial planner, the first question out of their mouth is about the stock market.

“Oh really,” this person might say. “What funds do you use? What do you think the stock market will do next year?”

I’m usually pretty direct here and typically say something like, “I have no idea. I’m not a stock picker. I help my clients focus on the things they can control and use money as a tool to help them live a life they love.”

Our industry has trained people to think like this and it is our job to change that mindset. A good place to start is how we get paid. If we want people to recognize the true value we add, doesn’t it make sense to align our revenue model with that value?

The first step is to separate financial planning and investment management advice.

How to Handle Providing (and Charging Separately for) Planning and Management

As a CERTIFIED FINANCIAL PLANNER™ Practitioner, my expertise is comprehensive financial planning. I help people with cash flow analysis and budgeting, goal planning, debt management, insurance and risk management, 401(k) investment allocation, estate planning, taxes, career, life planning, college funding, buying a home, retirement projections and anything else that may arise along the way.

I want to make it very clear to my clients before they hire me that they are doing so for the above reasons. Our relationship begins here... every time. As such, they pay me like they would pay any consultant in a specialized field; advice based on a specific area of expertise.

In fact, I like to call myself a personal trainer for my clients' finances for that very reason. I get paid based on the advice and guidance that I provide to my clients. This is why they hired me. There’s no ambiguity.

I also explain to them that I do manage money for most of my clients. Although it is not mandatory that they use me as their investment manager, it does make sense. Since I have the most intimate understanding of their personal finances, I can provide them with investment advice and management that fits with their overall strategy.

This is a separate area not covered in the initial planning. Again, I make this very clear from the beginning. Investment management is certainly a different skillset than cash flow and goal planning and it’s important to separate one from the other.

The services provided in this area consist of risk tolerance analysis, asset allocation, investment selection, and investment management (trading, rebalancing, market analysis, new strategies). This area certainly ties in to the financial planning process, but it is a completely different service.

Both areas are vitally important to the long-term success of the advisor/client relationship. One cannot be done without the other.

The important thing to remember is that clients are making judgments based on your “perceived” value. It doesn’t matter what you think you are providing if what the client thinks is something entirely different.

Clearly defining your services and the role that you play in the financial planning process is key. Aligning these services with the way you get paid is a great place to start.


About the Author
Eric Roberge is a Certified Financial Planner™ (CFP®) and founder of Beyond Your Hammock. He works face to face and virtually with professionals in their 20s and 30s, helping them use money as a tool to live a life they love.

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