A Matter of Time: Principles, Myths & Methods for the Hourly Financial Advisor

Introduction

Running a business in an hourly fashion is only possible for a true expert who can demonstrate value for every dollar. This is why established professions such as law, accounting, and medicine are able to charge explicitly for expertise.

In this book, we set out a case for the hourly model as a viable and attractive option for the professional financial planner of the future.

For the advisor who adopts it, the hourly model offers two unique benefits:

It is possible to charge for value and demonstrate the value-fee relationship.

It provides a clear set of internal levers for running the business efficiently.

Today most firms have adopted an assets under management (AUM), retainer, or commission compensation structure, and very few planning firms follow an hourly model. To many observers, it is a baffling choice and will likely remain so.

The book is aimed chiefly at the next generation of planners and founders who are interested in alternative approaches to the two critical issues: value-based pricing and business management. And have a taste for adventure.

We admit that the hourly model is difficult to implement successfully if you do not know how. In particular, it is dangerous to follow rules that apply in traditional financial advice firms, but seldom transfer to an hourly context.

The insights contained in this book are based on real-life experiences, acquired over two decades building and running an hourly planning firm (Timothy Financial Counsel), and having to overcome many of the challenges hourly practitioners are likely to encounter.

We hope the book will serve as a starting point for those who are inspired by the challenge of building a future-ready firm. If this is the path you have chosen, welcome and good luck.

PART 1

FOUNDATIONS

Chapter 1

Myths vs. Reality

Myths about the hourly model are many and varied. Why begin the book with them? Because many of the problems that hourly firms face can be traced back to a myth about the hourly model, which the firm’s founder has at some point internalized.

This could be the result of a conversation with another planner (everyone has an opinion about the hourly model) or through a self-generated assumption that has never been challenged.

Deprogramming yourself of these myths is the first and potentially most important step on the path to success. If you are new to the hourly model, or considering it as an option, knowing these issues is also an excellent place to start. As we will see later on in chapter 3, there are enough genuine challenges with the hourly model to occupy the mind of a firm owner, without the need for mythical ones.

Myth 1: Hourly fees are only for the middle market.

It is acknowledged that the hourly model makes it possible to give high-quality financial advice to the middle market, or consumers who fall outside the scope of the retiree-oriented, asset-focused advisory firm. However, the benefit is a by-product of the model rather than its raison d’être. Hourly advisors are free to serve anyone and everyone.

Although Mark’s colleagues serve clients who range from recent college graduates to high net worth individuals ($1m+), Mark’s own clients are typically ultra-high net worth ($20m+). As the needs of such individuals are often highly complex, yearly fees for a single client can run into the tens and even hundreds of thousands.

Hourly advisors, in other words, should not confine themselves to targeting clients who are less well off, or see their role as serving the clients that other advisors don’t want.

In fact, focusing on less complex clients exclusively may, in the long run, result in limiting or eliminating the profitability of the firm. The desire to serve the underserved is a worthy goal and can be achieved within the scope of a firm that serves multiple client types at differentiated rates (see chapters 4 and 5 for more details).

The versatility of hourly is one of its greatest strengths, and it should be used to full effect.

Myth 2: Hourly fees discourage existing clients from asking for advice.

The idea here is that charging clients whenever they request advice will make them less likely to do so. Yet people engage in activities every day that they know will incur financial cost. For example, no one questions the fairness of an airline charging for a flight, or a hotel charging for a room. People often look forward to events—such as holidays or weddings—that involve significant financial outlay.

If they don’t perceive the value of the exchange (as in the case of parking tickets, late fee payments), this is a different story. But in general, if a service has value, people are willing to exchange money for it.

Clients who see the value of advice will be no more reluctant to pick up the phone than they would be booking an appointment with a personal trainer, hair stylist, or accountant.

Hourly does mean that clients are less likely to call simply to pass the time of day, or to ask trivial questions that do not require the advisor’s expertise. This arrangement makes the most of your time and your client’s money.

Myth 3: Time-tracking is a nightmare to implement.

While setting up an effective time-tracking system is not easy, the actual process of tracking your time need take only ten minutes a day. Even considering the effort to set up and maintain the system, the investment is small considering the potential benefits (more about tracking in chapter 2).

Most financial planners do not have experience in time-tracking, never having been forced to do it. We suspect that the impression of time-tracking as an onerous task comes from observing other professions who are obliged to track time for regulatory reasons.

Lawyers can be expected to document how time is spent in increments as small as six minutes. Yet, somehow, this has not stopped them from wanting to become lawyers. Currently, in fact, many more people want to become lawyers than financial planners.

Financial planners do currently enjoy an advantage over lawyers, in that they are able to track time however they want. As we cover in chapter 9, this approach can and should be thoroughly pragmatic. Furthermore, technology is making the process of time-tracking easier all the time, with dozens of helpful apps to choose from.

Myth 4: Hourly fees make you inaccessible.

Everyone, regardless of pricing model, has the same number of hours in a year as everyone else. The issue is not really one of availability, but perception of availability.

It is true that if you do not charge for your time, clients may have the perception of unlimited access to your calendar. This perception will give way to reality when seven clients call you at the same time during a market downturn.

An advisor with no limits on their availability is ultimately less likely to be available. A planner with control over their time, however, is more likely to be available. For this reason, hourly planners can and do serve more clients than the typical advisor with a supposedly open door.

One way or another, advisors have to ration their time and get paid for it. Charging by the hour is a logical way of doing that.

Myth 5: You shouldn’t bill clients more during stressful life events.

Inevitably there will be difficult, unexpected life occurrences (such as divorce or bereavement) that create a sudden, urgent need for planning support. The worry is that, since the client will be in distress, he or she may feel that the advisor is compounding their woes with a larger-than-average invoice.

It is hard to think of any other provider of a valuable service related to a stressful life event, whether a funeral director or a divorce attorney, who would waive their fees on such grounds. It is precisely because they are adding value at a difficult time that their fees are warranted and earned.

If the client really does not feel they should pay, this is an indication that they do not value the service. This is revealed by the stressful event in question, but not caused by it. And it is a sign that the client may be better off with another advisor.

As we cover later, quibbles about fees from clients are the exception rather than the rule. Regular updates and clear setting of expectations up front are normally sufficient to allay any fears about runaway costs.

Myth 6: Hourly is cost-based pricing, not value-based.

Short of picking a number at random, cost-based is the worst way to go about setting prices. A firm’s revenues must exceed its costs, to be sure, but simply adding an arbitrary margin to an estimate of cost will not reflect the value of an item or service.

Value-based pricing is what every firm should aspire to. For financial planning, and professional services in general, we would argue that charging