At XYPN, we help financial advisors become successful RIA business owners by providing the support they need to launch their own RIAs and begin their entrepreneurial journeys. While owning your own business can be one of the most rewarding experiences, it also comes with risk and uncertainty.
Our launch series program helps mitigate the inherent risk of firm ownership by providing marketing, sales, financial planning, compliance, and business support throughout each of the phases of launching an RIA.
XYPN’s program is unique compared to other RIA consulting options in that we combine the compliance and business resources with access to a community of over 950 fee-only advisors who have all at some point launched their own firm.
XYPN Executive Business Coach Arlene Moss recently wrote about seven steps to take prior to launching your RIA firm; one of those steps is to determine the services you will provide to your clients and how you will charge for those services.
While at face value this may seem like a simple part of launching a financial planning firm, figuring out these details can actually be one of the most challenging aspects of launching.
While all the steps laid out by Arlene are equally important, we are going to dive deeper into the services and fees in particular, including what you need to determine, proper documentation, and some best practices for implementation.
We generally break the time before launching an RIA into two phases: pre-registration and pre-launch. We define the pre-registration phase as the time prior to a new firm owner filing their initial registration with the state to get registered. The pre-launch phase is the time between filing the registration and receiving state approval.
We separate the two phases so we can better help advisors document their planning services and fees in a way that can be submitted to a regulator for approval. After filing, we then shift the focus to the business and how to effectively implement those services with future clients.
So, when it comes to services and fees, what actually needs to be documented prior to filing an initial registration? We will break this into two different categories: investment management and financial planning services.
The first question you need to answer is whether or not you’re going to provide investment management services. If you are, how are you going to provide them? Are you going to manage your clients’ assets yourself or are you going to hire an outside manager or TAMP to manage your clients’ assets for you?
There are a number of considerations, specifically your level of expertise when it comes to investment management and also the time you want to allocate to research, portfolio building, trading, generating reports, ongoing monitoring, etc. If you decide to outsource, you will need to choose an outside manager and use their language for the ADV Part 2A.
This article lays out some of your investment management options. Regardless of who is managing the assets, you will need to choose a custodian. If you are using an outside manager, they will generally require a certain custodian. If you are managing yourself, you will need to pick a custodian and use their suggested language for your ADV Part 2A.
The next key consideration when defining your services is discretionary vs. non-discretionary trading. When deciding this, you will want to consider your portfolio management strategies. An active portfolio management strategy may necessitate discretion, while a passive strategy may be more suitable for a non-discretionary.
If you do opt for discretion, some states may have additional net capital requirements. Some states may also allow you to purchase a surety bond to meet these requirements. RIA firm owners should check with their compliance/registration team to determine their state specific requirements.
Next in documenting your investment management services is your method of portfolio analysis. You will need to be able to articulate the methods of analysis and investment strategies you will use in formulating your investment advice.
Examples of this could be Fundamental Analysis, Technical Analysis, or Modern Portfolio Theory. This combined with your investment strategy (passive, active, tactical) will help define how you will build and manage a client’s portfolio.
The final piece to document is what securities you will invest your client portfolios in and what you will provide advice on (e.g. Mutual Funds, ETFs, Bonds, Options, Stocks, CDs, Commercial Paper, etc.).
After documenting how you will be managing assets for your client’s, the next step is to document how you will be charging fees. The first thing we recommend you decide is if you will be charging a percentage of assets, and if so, whether you are going to tier (what are you going to tier it on?) or offer a blended rate.
Once you have determined this structure, you can set the percentage of assets and the breakpoints.
After determining the fee structure, you must decide how will you charge: in advance or in arrears? Arrears is generally the preference from a compliance perspective because you are billing for services provided.
Finally, you must also have a documented termination and refund policy for client accounts when they are closed.
For the purposes of documenting your financial planning services and fees, we generally like to separate out comprehensive planning services from hourly/project-based.
When determining how you will provide your comprehensive planning services, a good place to start is to document each step in your process and then write it out as if you are explaining the process to a client.
Now let’s dive into a few of the areas you will need to include. First, it seems simple, but you need to determine if you will be providing the client a comprehensive upfront plan and how if so, how you’ll deliver it (written or electronic)? How many meetings per year will your planning service include? If you are providing an initial plan and then ongoing advice, what ongoing services will you provide and how frequently?
When starting to define the ongoing services you will provide, we recommend creating a calendar of the services your firm will be delivering throughout the year to the client. This serves multiple purposes. First, it’s a visual to review with the client that shows the value you will provide throughout the year (after the initial plan). This is important because as you bill clients ongoing, it helps to clearly show that you do, in fact, provide value throughout the year. Secondly, setting up a service calendar also helps you provide relevant content based on your clients’ needs. Lastly, it also helps you scale your planning services as your client base grows.
When you start to develop your service calendar, we encourage you to categorize by type of service: planning, investments, events, and client communications/reporting. Then you can break these categories into different services. For example, financial planning can be broken into cash flow/budgeting, insurance review, estate planning review, college planning, employee benefits review, etc.
Once you have decided on the services you want to provide to your clients, you can then schedule throughout the year in a way that makes sense for your clients.
When you start thinking about how you are delivering services, you want to consider the method by which you’ll deliver the information. Will you deliver information through in-person meetings? Video chat? Email? Phone calls? We see that advisors who implement an ongoing fee for advice generally communicate electronically with clients on a monthly basis, via video/phone quarterly, and via in-person meetings semi-annually.
Your service calendar also provides documentation for regulators of what services you are providing and when. This will help demonstrate the value of the ongoing services for the fees you are charging.
After documenting your planning services, it's time to document you planning fees. It’s important that your fee structure aligns with your planning services.
If you are going to provide an upfront comprehensive plan, will you charge an upfront fee and what will the range be? If you are going to provide ongoing services, how often with you charge (monthly/quarterly), and what will the range of fees be?
For both upfront and ongoing fees, will you provide one service level for all clients or will you provide options; if you will provide options, how will you determine what is level it right for clients?
The first question you need to answer is whether you are going to provide your clients the option for hourly/project-based work. This option is easy to price and works well for one-time offerings. On the downside, it doesn’t necessarily foster ongoing relationships and it's difficult to scale because you are not focusing on the same services with each client.
Generally there are two different ways to offer project-based services: either as general financial planning for a one-time or limited-time engagement or for a specific service provided to a client. This could be budgeting, cash flow analysis, student loan analysis, or portfolio review to name a few.
If you plan to offer these types of project-based services, you should be able to provide in detail the service you will be providing.
When determining your fees for these types of services, it's typically a flat fee or a range based on complexity. If you are offering multiple project-based options, it's important to document the fees for each.
Finally, with this type of work, you need to determine when the fee will be due. Often this is done as 50% due upfront with the remainder due at completion.
With all types of fees, you need to determine what types of payment you will accept, as well as your termination and refund policy.
Documenting services and fees can be one of the most challenging aspects for financial advisors as they look to launch their RIAs. Many know the services they want to provide and how they want to charge, but documenting and accurately pricing those services takes careful consideration and ample time. This is often why the majority of XYPN firms update their pricing (i.e. increase their fees) in their first three years.
We offer this one piece of advice to all of firm owners as they develop their client service and pricing model: it doesn’t have to be perfect. As you begin working with clients, you will most likely uncover changes you’d like to make, and that’s okay.
Documenting your services and fees is an important first step, but then implementing them with your clients will offer a whole new perspective. This is why it's important to look at your services and fees from both a compliance and business perspective. This allows you to meet your regulatory requirements, provide the best possible service to your clients, and build the business you have always envisioned.
About the Author
As XYPN's Director of Advisor Success, Malcolm is tasked with doing just that—helping advisors succeed. After graduating from Gettysburg College with a B.A in Management, Malcolm jumped straight into the financial services industry and never looked back. With a drive to help shape the future of financial planning and a passion for bringing financial advice to the next generation of clients, he has a lot in common with the advisors in the Network.
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