Financial planning has been used as a marketing tool to sell a product or to conduct a specific needs analysis of a client’s investment or insurance requirements for much of the past 30 years. This is better known as modular financial planning. But while the financial services industry is moving to a full financial planning model, the importance of the financial plan is still not presented to the extent that it should.
What this means is that the financial plan is an independent milestone in the financial planning process — and it has value and integrity as a standalone document for which clients will pay a fee. Thus, financial planners should not be hesitant to charge for this important document.
Some organizations either provide a financial plan free of charge if you buy their products or believe it’s just some calculations using a software program to measure client risk. These programs indeed provide great features, but financial planning software is merely a tool and does not replace the need to engage with clients and discover their financial, life and retirement needs. Furthermore, providing a financial plan as a loss leader and free of charge to sell product may call into question the integrity of the recommendations.
Here are some of the myths that financial advisors have about using a financial plan and charging a fee for it, followed by the realities:
- “My client does not need a financial plan. I am just selling him a mutual fund or insurance policy and a basic ‘needs analysis’ will do.” (This is a great opportunity to propose a financial plan to ensure his overall needs are in balance.)
- “My client is well into her financial lifecycle with substantial assets and just wants me to invest some money for her.” (This is another opportunity to propose a plan to check that her other needs such insurance, estate planning and retirement planning are place and not over or underserved.)
- “My client has minimum assets and just does not need a financial plan.” (Whatever your client’s stage in his or her financial lifecycle, he or she needs a roadmap however basic to get them on the right track.)
- “My client will not pay for a financial plan because he has heard that advice is free.” (Advice is never free and has always been paid through commissions. Moreover, this advice is product oriented and may be part of the implementation of a financial plan but is not financial planning advice.)
These above scenarios highlight the bias towards downplaying the financial plan document. Although these excuses are usually presented by advisors not using the financial planning process, the charging of a fee for a financial plan can be a challenge for all financial planners.
So how can a financial planner charge for a financial plan?
- First, you must believe every client needs a financial plan if they do not have one already.
- Second, you must have a process to allow clients to self-assess their situation and realize that they need a financial plan.
- Third, you must educate clients that the financial plan is independent of anything else that you may do for them and that they can take the plan elsewhere to implement its recommendations. In most cases, clients will stay with you to implement their finanacial plan if you have done a good job and have built trust throughout the engagement.
- Fourth, and most important, you must discuss with the client that much like most professional services — such as consulting a lawyer or accountant — there is a fee involved. The key is to provide a reasonable fee that clients will pay, which may mean it’s not an hourly charge but a set price.
- Finally, charge a small annual fee to keep the plan up to date.
With the nature of compensation likely to change and with the second phase of the client relationship model requiring full disclosure of fees, in dollar terms, that clients are charged, this will present an opportunity to coalesce the needs of clients to have independent financial plans and for you to have billable services that add real value.
Start the conversation today and don’t hesitant to charge your clients for the service of developing an independent financial plan.