Journal of Financial Planning: December 2021
Cody Garrett is the founder of Measure Twice Financial, a solo RIA that provides flat-fee financial planning for DIY investors on the path to early retirement. Passionate about financial education, he also shares one-to-many online resources with DIY investors (Measure Twice Money) and financial advisers (Measure Twice Planners).
In March 2021, I received a phone call from a prospective client, Brian. At age 55, he was counting down his future pay statements on one hand. Based on his significant 401(k) balance and Social Security estimates, he was “pretty confident” he had enough money to maintain his desired lifestyle in early retirement, but dozens of new variables were ruminating in his mind. “What happens to my healthcare coverage before Medicare? Can I get a mortgage without a job? Do Roth conversions make sense, and how much should I convert each year? Can I access my 401(k) plan without penalties? The accumulation phase seemed easy, but how do I take money out?”
Filled with anxiety, Brian knew he needed a second opinion. He remembered hearing something about the importance of working with a “fiduciary” adviser, so he started his Google search. Two months later, my office phone rang.
Overwhelmed and fed up with the industry, Brian exclaimed, “I have interviewed almost a dozen fee-only financial planners, and none of them will help me create a financial plan without the expectation to manage my money!” He was willing to pay for financial planning at this point, but he wanted to maintain control over his investments. He understood the benefits of low-cost, passive investing and the power of compound interest, including when it worked against him—he was not willing to give up 1 percent of his portfolio each year in perpetuity for value he did not yet perceive. Although research like Vanguard’s “Quantifying Adviser’s Alpha” white paper demonstrates the value of relationship-based financial services, DIY investors like Brian want to get the best of both worlds by consulting a planner for education, then implementing the investment decisions themselves.
How to Engage DIY Investors
Like many who search for financial advisers, Brian thought fee-only was synonymous with flat-fee, one of the many language inconsistencies within our industry. Imagine the frustration of finding a fee-only financial planner with the heart of a teacher, soon to find out their firm only offers the assets under management (AUM) compensation model. DIY investors may be willing to delegate wealth management at some point in retirement, but not right out of the gate.
These disciplined investors often go beyond the basics, drinking out of a fire hose by reading personal finance articles, listening to podcasts on double speed, and refining their spreadsheets with each learned concept. To use a metaphor from the medical profession, they have Googled their symptoms and checked WebMD for every possible treatment, but they have come to a point when they are ready to consult a real doctor and get a second opinion. After all, these are important decisions to get right.
DIY investors seek financial education related to dozens of planning topics outside of investment selection. The families I serve often exclaim, “I don’t know what I don’t know,” seeking education, not delegation. Here are other financial topic areas that show up within many of my planning engagements:
- Debt financing and repayment
- Asset tax location
- Educating savings
- Charitable giving
- Employee benefits
- Insurance (life, disability, health, long-term care, property and casualty, liability)
- Retirement savings needs and options
- Social Security
- Roth conversions
- Accumulation and distribution orders of operation
- Retirement spending plans
- Income tax
- Estate planning
For my DIY investors, I summarize each of these financial topics as a page within our planning document, resulting in an educational presentation and measurable action plan that provides the clarity and confidence necessary for clients to implement their own, well-informed decisions.
Many advisers assume that all DIY investors do not value financial planning or are anti-adviser. While there is some hesitancy within these communities to hire an adviser, hundreds of thousands of families are scouring Facebook groups and other social media channels, figuring out how to apply broad financial knowledge to their unique objectives and align their money with their personal values. They often seek help from strangers online who know nothing about their complex financial situation, assuming our industry does not want to serve them without selling something. Many advisers have the capacity and knowledge to help, but they do not have a transparent service, process, or compensation model that aligns with this specialized demand.
An advice-only financial planner is like a bench press spotter in the gym. We educate about proper form and encourage our clients to define personal expectations for growth, stability, and flexibility, but we do not lift the weights for them. I define the success of a financial planning relationship by clients’ level of confidence to implement their own decisions, ultimately understanding the “why” behind their actions. I am hopeful and believe the future of financial planning will serve delegators, DIYers, and everyone in between.
What Does the Comprehensive Planning Process Entail?
We must understand where we are before determining where to go and how to get there. The financial planning process includes a comprehensive review of a family’s financial ecosystem. Planning clients upload between 40 and 50 financial documents to a shared file. These may include information about investments (bank, taxable brokerage, retirement, education savings, health savings), liabilities (mortgages, auto loans, student loans, private loans, credit cards), income and expenses (pay statements, Social Security, living expense summaries), insurance and risk management (life, disability, health, long-term care, property and casualty, liability), employee benefits (employee handbooks, SPDs), tax (federal, state, and local returns), and estate planning (wills, POA, advance directives, beneficiary designations, trusts). Not only do these financial documents provide an understanding of a family’s quantitative landscape, but they also provide incredibly personal insights for qualitative discussions. For example, a Social Security statement shows the arc of a person’s career, including when they first started working. Imagine the look on your client’s face when you say, “Diane, I noticed you started working at age 15 and made $2,000 that year! Wow, I would love to hear more about that.” Whether she loved or hated her first job, Diane’s face lights up as she thinks about her journey, and she realizes this meeting is about her, not just her money.
Financial planners often want to know the best questions to ask new clients. The best questions stem from a place of authentic curiosity about the families we serve, with active listening being the primary source of our inquiries. Great questions are in response to opportunities for clarification we discover within personal financial documents. Do not underestimate the power of storytelling through the review of quantitative data!
As financial advisers, we need to be careful not to simply take an inventory of symptoms (financial data) and create recommendations without understanding the values, objectives, and experiences of the humans we serve. How can we change our financial planning processes to reiterate the focus on relationships rather than transactions?
How Is the Advice-Only Model Profitable and Sustainable?
When determining a compensation model for my RIA, I found it helpful to break the process into three steps. First, determine who you are serving. Create an avatar for your ideal client. How old are they? What is their marital status? Do they have dependents? Do they own a business? What are their expectations for a planning relationship? Do they have a unique financial philosophy? Are they overwhelmed? Are they visual/auditory/tactile learners? Once you know who you want to serve, you can determine how you will provide the most value to them. Then, develop a service and process that provides substantial value to your ideal client. After defining who you will serve and how to provide value to their family, it is now much easier to solve step three. Ask the question, “what is the most appropriate way for my ideal client to pay for the service I provide?” Reversing this process and focusing on revenue first is unlikely to lead to a business model in which you serve your clients with authentic enthusiasm. I find it helpful with any business decision to ask, “how can I provide more value to the families I serve?”
Before launching my firm, I defined my ideal client as a young married couple, ages 30–45, hoping to be financially independent (work optional) within 10 years as DIY investors. It is not a coincidence this looks like my family! They earn gross income between $150,000 and $250,000 and have a 30 percent or higher gross savings rate. Their prioritized financial planning objectives include tax-efficient accumulation and distribution strategies, total portfolio review, employee benefits opportunities, and healthcare options before Medicare. The service that provides substantial value to this family is truly comprehensive financial planning over a short period (three months, three meetings), focused on education to help them implement well-informed decisions over the next year. Due to the comprehensive scope of planning, upper-middle-class income, and the family’s desire to manage their own investments, the compensation model that is most appropriate for the families I serve is flat-fee financial planning. Every household pays the same fee for the same service, half paid upon signing the engagement letter and the other half paid upon our plan presentation call. I initially determined my flat fee based on 2 percent of gross income for the ideal client avatar (2 percent × $200,000 = $4,000), but I have since raised the planning fee due to demand exceeding my intended capacity for one-on-one planning. I feel comfortable raising my fee because I understand the value is a multiple of the cost.
Breaking Away from AUM
Since advice-only planning does not involve investment management, the compensation model is typically unrelated to a client’s level of investable assets. An additional benefit of not charging based on asset size is that investment performance is one of the planning variables that is primarily out of our control. The stock market is also uncorrelated with the value we provide as financial planners. Hourly and project-based flat-fee models are appropriate for limited-time engagements, while monthly or quarterly retainer models make sense for ongoing relationships.
One of the benefits of providing financial planning as a flat-fee, project-based engagement is that families can experience the value of a financial planning relationship without a long-term commitment. As financial advisers, we understand that “plan” is both a noun and a verb, and a one-time financial plan can be a natural gateway to financial planning. Although I do not offer an ongoing retainer model, many financial planning clients show interest in an annual engagement to re-establish financial objectives and refine the action plan over time.
The profitability and sustainability of my flat-fee planning model is the primary concern I hear from other advisers: “If all of your clients want one-time plans, aren’t you worried about running out of clients to serve?” “Why would you set up a business model that only pays you when you are working, without the option to take paid time off?”
Like financial advice, the answers to these questions are not one-size-fits-all. The profitability and sustainability of a business model depend on the financial needs of the business, the firm owner, and employees. We also cannot determine our need for revenue without understanding our outflow. Maintaining low business costs allows my company to be profitable with only one flat-fee engagement per month, requiring five hours per week of financial planning. If my total expenses were four times what they currently are, I would increase my capacity to four engagements per month. This level of flexibility allows me to set a limited capacity for one-on-one planning, make progress toward my family’s financial independence objectives, and spend more of my time providing one-to-many financial education to members of the financial independence community. My ability to serve more people outside of my business correlates with the demand for one-on-one planning, making both the business and my passion for financial education sustainable over the long term. It is an incredible cycle that follows the principles of The Go-Giver by Bob Burg and John David Mann—“Giving is not a strategy. It’s a way of life.” I believe profitability will naturally result from serving others without expecting something in return, rather than it being the primary metric of my purpose or personal success.
