I received a number of excellent comments to my May 30 AdvisorOne blog about changing fee structures to smooth out revenues. The first came from Morsch Morscheimer, who raised a timely issue when he wrote: “I revamped all of my fee structure to avoid the backlash of market declines, AUM fees and commissions. Put simply I bill my clients as if I were an attorney. Want me to listen to your tale(s)? $XX per hour. Advice? Ditto….”
Over the years and particularly at the beginning of my career, I have been exposed to hundreds of advisory firms that charged clients all or in part based on hourly rates. From that experience and subsequent observations, I have two problems with charging hourly fees for advisory work.
The first is probably more of a suspicion, but I can’t help wondering whether hourly fees really do smooth out revenues. Seems to me that during economic downturns, such as the one we’re currently trying to recover from, people in all economic classes become more cash-flow -conscious; making an effort to reduce their outflows, both large and small, wherever they can. To my mind, that can’t help but translate into reduced calls and visits to financial advisors, especially when folks know the meter will be running.
My second issue with hourly fees is more concrete. Just as is the case with charging commissions, hourly rates transform an advisory business into an advisory job: A labor-intensive job based solely on transactions. Advisors’ revenues entirely depend on how many client hours they can bill out in a given year.
Which means revenues are limited by fairly rigid constraints. Increasing productivity through additional staffing support or improved technology quickly hits a brick wall. So does raising fees. And growing revenues as clients become more financially successful is usually marginal at best.
What’s more, just as with commissions, every January 1, your firm starts at zero revenues, with the year’s income solely dependent on what you produce. I’m willing to concede that hourly fees are probably more predictable than new commissions, but they are still a function of how much each advisor works with clients. Every hour spent managing the firm, dealing with employee issues and/or training new advisors comes right off the top line. Which is why it’s almost impossible to transform this job into a real business.