Why I Don’t Offer Hourly Financial Planning

Ken wrote to me last week and said:

Jesse – Hard to say whether I enjoy your blog or podcast more. Both wonderful! I was looking at your “work with me” page… it looks like you don’t offer hourly services. I’d gladly pay you $150 or $200 per hour for a few hours of your time. I’m curious why you don’t work hourly?

Thanks for the kind words, Ken. You’ve touched on a common question. So far this year, about 30 of you have wanted to hire me for an hour here or a quick retirement check there. I’ve said no. I do not offer hourly planning services.

But why?!!?

Wegmans vs. Costco

Why doesn’t Costco have a curated cheese and olive bar like Wegmans? 

Why doesn’t Wegmans sell diapers in packs of 222 (!) like Costco? 

It’s pretty simple. They have different business models and different “ideal customers.” Those customers have different wants, needs, and expectations. And both businesses can thrive in the same market.

The same applies to the financial planning world.

Some people do not want an hourly planning service, nor a one-time planning service. They want an on-going relationship with a financial planner for the rest of their life, and expect to pay an annual fee for that.

Some people want Wegmans. Some want Costco.

Some want hourly services. Some want full-time.

This statement is polarizing, especially in the DIY personal finance movement, because many DIYers do not want an ongoing relationship. They want a static, one-time service to spot-check their DIY results. Their “DIY” instinct is so strong that they’d never need a full-time professional in their corner.

• If you’re a fitness buff, you’d probably never hire a personal trainer.
• You’re less likely to order dinner in if you’re a fantastic cook.
• If you’re handy, you’ll remodel your bathroom instead of hiring a contractor.

This is the way of the world! If we’ve developed strong DIY skills, we are less likely to hire a professional to help us.

If you love digging into every nook and cranny of your financial life, and you’re accepting of the consequences (good or bad) of your decisions, then you should 100% continue down the DIY path

If that sounds like you, I get it. It’s certainly is how I felt as a DIYer.

But…

Please trust me when I say this: most people are not like us. They do not want to be a retirement planning DIYer.

They want to outsource it to a trusted expert, full-time. They do not want to fly the plane. They want to hop in the back, hands off the tiller, and let a professional pilot fly them to their destination.

I don’t need to be a 7/11 Convenience Store, catering to people who just need a quick item. My business model (more on that below) works without hourly engagements.

Regulatory Hassle and Compliance

There’s a broader reason so few good financial planners offer hourly or one-time services: it’s a regulatory and compliance hassle. For better or worse, running a firm offering ongoing services is significantly easier.

To be an independent financial planner, you must form an organization called a registered investment adviser, or RIA. An RIA is a firm (not a person) that is registered with either:

• The Securities and Exchange Commission (SEC), if the firm manages $100 million or more in assets, or
• State(s) regulators if the firm manages less than $100 million.

RIAs provide investment advice to clients (individuals, families, businesses) and are fiduciaries by law. They are legally obligated to always act in their clients’ best interest. They must register (with the SEC, or at the state level), disclose fees, file regulatory documents, and adhere to compliance rules.

Let’s consider those registration rules through the lens of hourly planning. 99.9% of hourly planning clients only want advice (“advice-only”) and do not want investment management. Therefore, the $100M federal threshold will never be reached, and hourly planners must instead register at the state level. To make matters “worse,” they must register in every state in which they have 5+ clients.

Personally, I would have to register in New York, California, Texas, Florida, Washington, North Carolina, Tennessee, Georgia, Illinois, and I might be missing a few more.

That’s a lot of regulatory hassle I would have to manage independently as a solo hourly planner. I cannot charge clients for that time. It’s simply a sunk cost.

Instead, I am an employee at an RIA in Rochester, NY. We’re above the $100M threshold (around $3 billion), and only have to register with the SEC – no state regulations. I have a specific colleague who handles that compliance work. I just get to focus on working with clients.

Personally, I have zero regulatory hassle.

…And The Juice?

To be an hourly planner, is the juice worth the squeeze? We’re here in a capitalist system. The payoff needs to be worth it.

So let’s talk fees and revenue.

The SEC does not mandate any maximum hourly fee, but some states impose a maximum of $250 per hour. Ken (the reader who wrote to me) was comfortable offering me $150 to $200 per hour.

It’s fair to ponder, “Well…$200 per hour multiplied by 2000 working hours in a year…that’s $400,000 of revenue, Jesse! That’s amazing!”

However, this assumption has significant problems. In short, no hourly planner comes close to 2000 billable hours in a year. Most don’t even reach 1000 billable hours.

Before I can offer any client the first morsel of advice, I need to do (on average) 4 hours of work. I must

1. Meet with you to discuss working together (or not),
2. Learn all of your financial facts and circumstances, goals, timelines, etc.,
3. Set you up in recordkeeping software and perform the necessary compliance activities,
4. Set you up in our financial planning software and upload your relevant information.

That’s $800 to $1000 of my time before you get your first answer. Most DIYers don’t like that. They won’t bite. As such, hourly planners need to make a concession. Charge less, give away time for free, etc.

This list goes on. Tons of “unbillable” tasks, including:

• Compliance, registration, archiving, and audits
• Business operations, like accounting and bookkeeping, quarterly taxes, researching and integrating the “tech stack,” etc.
• Choosing and maintaining planning software, scheduling, client onboarding, a customer relationship manager, portal/file share…and do all that under an umbrella of perfect cybersecurity.
• Marketing and business development. Ok – so, this blog and my podcast play a huge role in my current business, but they take a ton of time! No client pays me for the hours I put into these projects.

As Mike Piper wrote on this similar topic:

Relatedly, many people assume that an hourly financial professional’s weekly compensation is probably somewhere along the lines of 40x their hourly rate, but that’s not remotely the case. A 2023 AICPA survey found that an hourly billable rate of $204 (which was the average for CPAs with 8-10 years experience) equated to an average annual compensation of $105,662 — or $2,032/week (i.e., 10x their hourly billable rate). And I strongly suspect that it’s typically lower than 10x for hourly registered investment advisers, given that RIAs are regulated more heavily than CPAs (i.e., have to spend more time on compliance activities that are not billable).

It might sound crazy, but the average accountant bills at ~$200 per hour for 10 billable hours per week, and Piper believes the hours for hourly financial planners are even lower.

That’s charging $200 per hour to make $100,000 yearly (or less). Ask any attorney or accountant for their feelings about hourly billing. It’s a notorious pain and a significant business hurdle.

What To Do Instead?

This is why most RIAs opt for an asset under management (AUM) percentage billing model. They are businesses. This billing model results in more consistent revenue for less regulatory hassle, with lots of individuals and families knocking at the door to sign up. As a business owner, it’s common sense to go this route.

Interestingly, the same states that cap hourly rates at $250 per hour also cap AUM rates at 2.0%.

Now – a 2.0% annual fee is a lot, and it ought to come with every service, piece of advice, and expertise under the sun. I’d venture that 99% of firms charging 2.0% are committing highway robbery, and the same cannot be said for an hourly planner charging $250 per hour. These two fee maximums are vastly different, but the state regulators don’t seem to see that.

Thankfully, the Kitces research team found that most RIA firms have significantly lower AUM fees than 2.0%, especially as a client’s wealth increases.

Simply put, as asset size grows, the required work and expertise (typically) don’t scale equally. Thus, the fee should “decay” as asset levels increase. 1.00% is the “industry standard.” The average management fee where I work falls in the ~0.65% range.

This style of AUM fees isn’t over the top.

One lens to examine this truism is through profits. If a company is raking in huge profit margins, that’s a sign it might be charging too much.

Fiduciary RIA firms typically have a 20-30% profit margins. Legal and accounting firms have similar margins. Healthcare, construction contracting, and auto garages might have 15-20% margins. Grocery stores, famously, have near-zero margins (1-3%).

However, since AUM firms’ revenues are based on portfolio performance, those margins can dry up during bear markets. During the Great Financial Crisis, for example, some of my colleagues (those in leadership/ownership) went years without taking a paycheck. This was a means to ensure that other employees could keep their jobs. Think about that risk!

There’s also an “incentives problem” to consider. Friend-of-the-blog Charlie Munger famously said,

Show me the incentives, and I’ll show you the outcomes.

I feel four strong incentives working inside an annual AUM fee model that aligns my work with my clients’ goals…

1. Client success = Business success. You might have heard that one tagline, “If you do better, we do better.” This creates a long-term, win-win alignment.
2. Retention focus. Because I don’t charge a one-and-done fee, I am incentivized to build trust, offer excellent service, and think long-term for my clients.
3. Discourages unnecessary trading. Unlike commission-based models, AUM fees don’t reward transactions, so I have no incentive to churn or sell products. I only feel the need to give honest and good advice.
4. Encourages holistic planning. Since the fee isn’t tied to hours or tasks, my team is free to do deeper, ongoing work (estate planning, tax planning, retirement optimization, behavioral coaching) without needing to “bill for time.”

The AUM model isn’t perfect. But I believe it strongly aligns clients with their financial planner. I can point to so many instances of client success in just 4 short years since my transition from engineering.

These are all the reasons I don’t offer hourly advice.

Thank you for reading! Here are three quick notes for you:

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We’ll talk to you soon!