Q&A: Is the Future of Financial Planning Retainer-Based?

Fee-based financial planners are often under pressure to reduce their prices.

That's especially challenging when planners must compete against big firms such as Vanguard and Fidelity, which have the scale to offer investments at lower price points than smaller registered investment advisors can offer.

When the traditional compensation models don't work anymore, it's time to reevaluate how you charge and what you're charging for. One strategy is this: Instead of charging clients based on their assets or collecting a commission on their investment purchases, you could charge a flat fee for access to your advice, called retainer-based financial advice.

We spoke with Fred Hubler, president and chief wealth strategist at Creative Capital Wealth Management Group, who pioneered a retainer-based financial planning model where clients pay a flat, quarterly fee for advice on anything finance-related. We spoke with Hubler about why this model is so effective and how advisors can transition their practices to a similar model. Here are edited excerpts from that interview.

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What is retainer-based planning?

It's like having a lawyer on retainer for legal questions, except clients have a financial advisor or certified financial planner on retainer for financial questions.

If a client is working and wants to know where to allocate her 401(k), she can ask us. If she needs to decide to buy or lease her next car, she can send the question to us. The questions don't have to be investment-related, although we can answer those in our sleep. They can be tax questions. We can help them shop around their life insurance. And we're fiduciaries because they're paying that retainer, so we have a legal obligation to do what's right for the client whether it benefits us or not.

They can keep their assets at Vanguard or Fidelity or whatever broker they choose and use us for advice.

The traditional compensation models in the industry of taking a commission on products or charging a percentage of assets under management, or AUM, aren't effective anymore. There's nothing wrong with earning commissions, but the client is always questioning if the product is better for the advisor or the client.

[SEE: 6 Pros and Cons of Choosing a Fee-Only Financial Advisor.]

For AUM to be effective, the client has to have assets to bring over to the advisor, but many clients have a lot of assets that can't be brought over. Working professionals often have the bulk of their investments in a company 401(k) and can't roll that over to the advisor until they stop working. Or business owners have the bulk of their net worth tied up in their business.

I have a client who owns multiple chain restaurants. Most of his net worth is in his businesses. He had $400,000 to invest and asked me what to do with it. My answer was for him to upgrade his restaurants. If I used an AUM model, my answer would be that he should invest the $400,000. But by reinvesting in the business, his sales would go up, making it the better financial move.

If you're just doing AUM, everyone looks the same. And time is everyone's most valuable commodity, and the advice is really what people want. That advice is more valuable for someone who can't get it from a traditional AUM or commission-based advisor because those advisors don't want to help them with their 401(k).

Retainer-based planning allows you to charge for advice and to give advice that's right for the client, even though it's not always going to be what's best for the advisor.

[Read: Protect the Point -- How Advisors Can Deliver Tangible Value to Clients.]

How are the dynamics different when working with clients on retainer versus based on assets under management or commission?

If you don't have good advice, you can't bill for it. And if you're not set up to look at outside 401(k)s and accounts, you can't do the work.

There are a lot of unintended consequences, but they're all good to the consumer.

For instance, clients on the retainer model want to get their money's worth, so they'll ask for advice about more than just investments. It's an irony of human nature that you are less likely to use something you get for free. If clients get the advice for free, like in the AUM model, they're not going to show up for that annual review because they didn't pay for it. But clients in the retainer model, who are paying for the advice itself, are coming to that meeting because they paid for it. We have clients calling us asking when we're having their annual meeting because they have questions for us.

We're also getting better visibility into our clients' outside assets under the retainer model. We use a portal to allow our clients to connect outside investments to our service. We gave the portal away to our AUM clients and retainer-based clients. The AUM clients never use it while the clients to whom we bill the retainer use the portal daily. The retainer clients put more stuff in the portal because they want to see their money there. And when you give an advisor more data, he gives you better advice.

The client wants to give us more information because they want us to give them more advice.

I have never grown my AUM as fast as I did when giving retainer advice. We're giving clients advice on money they have outside of us. Some of these clients, being as busy as they are, don't want to be managing their Vanguard account on their own, so they ask us to do it for them. Of course, we'll do it. And if they bring more assets over to us, we tell them we'll waive the retainer proportionally. So if it's a $5,000 retainer, and they ask us to deploy $500,000, we waive the retainer.

So far, nobody has a retainer in the second year. During the relationship, all of our clients decide for themselves that they want us to manage assets equal to, and in most cases, way exceeding the retainer. But we don't ask them to bring the assets over. It's never our requirement. But at some point, they ask us to help them get into private equity that they can't get to at Vanguard or Fidelity. And if there were no assets with us in the second year, we would reduce the retainer because most of the work is done in the first year.

How do advors set their retainer fee under your model?

Each advisor probably should come up with a retainer model that gives both them and the client value. In my practice, I'm a little more advice-heavy because the advisors who are on my staff are CFPs. Going to a CFP is more expensive than just going to a normal financial advisor because CFPs have more pedigrees. So, if someone is a financial advisor that isn't a CFP, you probably shouldn't be charging as much as someone who is a CFP.

Our fee used to be a minimum of $5,000 per year, but because of overwhelming demand for us lately, our retainer now starts at $8,000 per year. There are people who don't have $8,000 worth of issues, so they probably don't need a retainer-based model, no matter what the price is. We will still meet with them and give them recommendations on what they need or could be doing, but they don't sign on for the retainer model. We help everybody, even if we don't get the retainer.

One mistake I made when I was starting out is trying to convert current clients already working with me under the AUM model to the retainer model. If you're an AUM advisor, you're giving the advice away for free, hoping the clients give you more of their assets to manage. These AUM clients aren't going to want to start paying for something they're already getting for free. But new clients with, say, $2 million or more would value a flat retainer relationship, especially if that relationship gave them advice on things they don't already get advice on.

Someone who is a highly paid employee at a Fortune 500 company, for instance, doesn't have anyone giving him guidance on that 401(k), and it's probably his biggest bucket of money. Some people's 401(k)s are $2 million to $3 million. Well, 1% of that is way more than the $5,000 or $8,000 retainer you would charge them.

What is your biggest concern with the retainer model?

My biggest concern is that I am disrupting an industry that does not like to be disrupted.

I told my wife that if I don't do this, and someone else takes this idea and pushes it out to the market faster than me, I'll need therapy for the rest of my life. I have the first-mover advantage right now. You can still be on the right track and get run over. But what I don't want is to be the third guy at Apple who gave the shares back.