Choosing a billing method for financial planning

One of the first decisions CPAs must make when they start offering clients financial planning services is how to bill clients for them. To CPAs accustomed to billing by the hour, the plethora of billing methods available to financial planners can seem bewildering. Alongside hourly billing, financial planners may use the fee-for-service, subscription pricing, or assets-under-management (AUM) billing models, and some choose to use different methods for different types of clients.

To shed more light on these billing methods, we discuss what factors CPAs should consider before they choose one (see the sidebar, “Initial Considerations”), and then hear from experienced CPA financial planners about why they chose the model that they did, how they implemented it, and why it’s the right choice for their practice.

A refresher on billing methods

Some of the most common billing methods that CPA financial planners use include:

• Hourly billing, in which clients pay an hourly rate for the services they need;
• Fee-for-service (also called fixed-fee billing), in which clients agree to pay a set fee for the service (or service package) they use; and
• Retainer or subscription pricing, in which clients make fixed, recurring (often monthly) payments for the services they receive.

Planners who handle investments may also use the AUM model, in which clients pay a percentage of the assets that the planner oversees.

The fee-for-service model: Paraklete Financial

Paraklete Financial Inc. in Atlanta uses the fee-for-service billing model. The process of determining a client’s fee begins by providing them with a two-hour complimentary personal consultation, said Susan Tillery, CPA/PFS, president of the firm. During the meeting, advisers assess the amount of work a client will likely require over the next 12 months and determine an appropriate engagement fee. The firm bases standard pricing for an annual plan on the assumption that an engagement will require 40 hours of work at a minimum. If it’s expected to take longer, advisers adjust the fee to reflect the additional time required. 

Paraklete charges renewal fees in the second and ensuing years, which are approximately one-third of the initial year’s fees. And those renewal fees generally aren’t raised until the fourth year of the client engagement, unless the scope of the renewal engagement changes significantly.

Because the fee-for-service method doesn’t require a minimum net worth or minimum investable assets, it enables the firm to work with a broader range of clients, Tillery said. In some cases, the model works better for business-owner clients than the AUM model. For many business owners, Tillery pointed out, their business is a large part of their net worth, and so they aren’t able to meet the minimum AUM required by advisers who use that model.

The retainer model: Padden Financial Planning LLC

Sheila Padden, CPA, founder of Padden Financial Planning LLC in Chicago, is a fee-only planner who uses the retainer model. Most of her clients sign yearly agreements with her, and they pay quarterly in advance, she said. She anticipates that she will meet with clients about six times in their first year with her and about four times per year thereafter, but that’s flexible. “My strong desire is to meet the needs of the client,” she said, and she will meet with them more frequently if circumstances warrant.

Padden chose the retainer model in part because it encourages this kind of flexibility, she said. Clients don’t have to worry about being charged more if they have life changes, such as retiring or selling a business, that cause them to need her services more often in a given year. “I really want to be with my clients on their life journey,” she said. “I feel like that type of fee structure really reflects the commitment to the clients.” Clients also like knowing how much they’ll pay in advance, she said.

She calculates a separate fee for each client based on the complexity of their finances. She uses a fee calculator tool from the Alliance of Comprehensive Planners, of which she is a member, as a starting point for determining fees. She doesn’t increase prices annually, she said, but does raise them when necessary.

Multiple methods: CLW Financial Planning

Firms often choose to employ more than one billing model. CLW Financial Planning, located in Raleigh, N.C., offers hourly rates to some clients while charging others annual fees.

Carolyn Larsen-Wieber, CPA/PFS, owner of the firm, said she uses hourly billing strategically with new clients because it allows her to work with new clients while putting less pressure on them.

“When a new client comes to me without being referred by one of my current clients, they might be hesitant to sign on for a full-year engagement,” she said. “Instead, they can opt for an hourly rate. I’ll give them an estimate of how many hours they’ll need, and we’ll go from there.” Her goal is to ultimately move these clients to an annual fee-for-service model, which most end up doing as they continue to work with her.

Larsen-Wieber said she prefers the fee-for-service model because it allows her to provide the most value to her clients. With a set fee, clients are able to call her as many times as they want, and she makes her services available for anything that comes up during the year. She also prefers this model from a business standpoint because it makes for a more predictable cash flow. 

The fee-for-service model does have some drawbacks, Larsen-Wieber said. Determining a set fee for a client takes a little more work upfront than hourly billing does. She bases her fees on how many hours of work per year she estimates an engagement will take, as well as other factors, such as the value she brings to clients, how complex a client’s situation is, and how many meetings per year they might require.

Larsen-Wieber tracks her time throughout the year to see how accurate her estimates are, but she doesn’t change her fee if clients need to meet an additional time or have an extra call. She reviews clients’ fees each year, renegotiates them if circumstances warrant, and sends out new engagement agreements and invoices. All this, she acknowledges, involves a lot of administrative work. But for her, the benefits of the fee-for-service model outweigh the disadvantages.

To determine her hourly rate, Larsen-Wieber looked at other professionals’ Forms ADV to see what fees they charged. (Forms ADV are used by investment advisers when they register with the SEC and their state authorities and are publicly available on the SEC’s Investment Adviser Public Disclosure website.) She then used that market data to set an hourly rate that she was comfortable with. (Personal Financial Planning (PFP) Section members can access Bob Veres’s fee surveys; the 2020 survey is available at future.aicpa.org.)

Hourly billing: Mercer Street Company

When Ryan Firth, CPA/PFS, founder of Mercer Street Company in Houston, started his firm, he gave clients three pricing options: hourly, subscription, and fee-for-service. But he soon realized that the subscription and fee-for-service models weren’t right for his business.

Instead, he chose to use an hourly model, as it felt most natural to him to explain to clients. Having formerly worked on engagements in audit, he was used to an hourly billing method and was more comfortable explaining the cost to clients in terms of how long something would take. “They can see exactly how I’m arriving at my cost estimate,” Firth said. “I’ll give them a range for how much a project will cost, and then I’ll let them know if it looks like we might go over budget.” The model also allows him to offer advice on an as-needed basis, which he wanted to be able to provide to clients who just need advice on a specific question.

To decide on an hourly rate, Firth looked at fee studies for his local market and chose one that was similar to the rates he was seeing in his research.

While Firth acknowledges that hourly billing makes it more challenging to scale compared with the AUM model, he believes that it’s the right path for his business. Charging hourly makes him more conscious of his time, so he tries to always use his working hours wisely.

A word on AUM

The AUM billing method is used mainly by financial planners who handle investments. Under this method, advisers’ fees typically come directly out of a client’s assets, making administration simpler, said Andrea Millar, CPA/PFS, of the PFP Division, Association of International Certified Professional Accountants, representing AICPA & CIMA. AUM “typically generates a solid fee for the value provided,” and clients find it easy to understand, she said. Some planners also feel that AUM aligns them better with the client’s goals, as they earn more money if their clients do as well, said Dan Snyder, CPA/PFS, director of the PFP Division for the Association.

AUM does have certain drawbacks. It’s only suited to clients who have enough assets under management to make it worthwhile for an adviser to charge a percentage. This requirement can leave advisers unable to serve clients who have high incomes but less money in investable assets, Millar pointed out. AUM may also cause clients to perceive that an adviser is more focused on investments than the other sides of financial planning, such as tax, estate, and retirement planning — whether or not that’s actually the case, she said.

More options means more clients served

Though the variety of billing models may seem confusing, Snyder believes that, ultimately, it’s “healthy for the profession, as different models appeal to different clients.” When clients have a variety of options to choose from, they’re more likely to find the right professional and have their financial planning needs met, he said.

Ultimately, all billing models have their pros and cons, and CPAs must weigh them carefully to decide which work best for them and their clients. They should also realize that their approach to billing may evolve over time as their client base or preferences change, Snyder said.

Becoming informed is the best way to narrow the options. Consider talking with other professionals to understand what they like and dislike about their billing method. The PFP Section also has resources that can help (see the “AICPA Resources” box for details). Doing the work now to find the billing method that is right for your practice will help you make a decision both you and your clients can feel confident in.

About the authors

Erica Gellerman is a freelance writer based in Hawaii. Courtney Vien is a JofA senior editor.

To comment on this article or to suggest an idea for another article, contact Vien at Courtney.Vien@aicpa-cima.com or 919-402-4125.

AICPA RESOURCES

Article

“The Benefits of Value Pricing (and How to Do It),” aicpa.org, 2020

Newsletter

Financial Planning Digest

Online resources

Investment Adviser Registration Case Study, free to AICPA members

Roadmap to Developing a Tax and Financial Planning Business, free to AICPA members

Tax and Financial Planning Services hub

Podcast episodes

“How to Approach Client Meetings and Offer PFP to Tax Clients,” AICPA Personal Financial Planning Section podcast

“The 3 Rs of the Retainer Model,” AICPA Personal Financial Planning Section podcast

Webcast

“Financial Planners’ Retainer: A Compensation Model That Works,” free to PFP Section members