Have you noticed one thing when pricing of Financial Planners is concerned? There is no unanimity on pricing. Each planner charges his/her fees based on some assumptions. But how you need to verify whether the planner is charging for service or for the cost of his lifestyle of business handling? Let us discuss it in detail.
This issue will not arrive when you are dealing with an agent. Because whatever the lifestyle your agent have, he will get the fixed return from product selling. Hence you no need to bother about the lifestyle he maintains. But when it comes to fee paying, you must analyze the fee structure and why planner fee is so high or low.
In India usually planners fee starts ranging from Rs.5,000 to Rs.50,000. The important point to notice is, there is no rule from any regulators about how much one can charge for financial planning. So it ranges from such low to steep high. Before going further let us understand how many ways a planner can charge the fees.
1) A percentage of your account value-This is one of the most common way of charging. Usually they charge some % of your account value. So if your invested value is around Rs.50,00,000 then they may charge 1% to 2% of this value on yearly base. So if your value grows yearly based on the investment advice of planner his earnings will also grow. Same way if negative returns mean negative earnings for planners. But if your values came down from Rs.50,00,000 to Rs.25,00,000 (reduction in 50%) then don’t feel that your planner fee also reduced to that extent. Because some planners fix the amount or % of the account value by stating whichever is higher. For example in the above case 2% of your account value or Rs.10, 000 whichever is higher. So even if the drop in your account value planner may receive the fixed fee.
2) Commission earned by way of selling-This is exactly like how your Insurance or Mutual Fund Agents earn. But there exists a conflict of interest hence you need to be cautious. As while dealing with such type planners there is no distinction between agents to planners.
3) The combination of the both-In this case planners earning by charging fees as well as by selling you the product. This type of planners are called fee-based planners. Detailed explanation about this is already written on my previous post titled “Fee-Only or Fee-Based Financial Planners-Who is best for you?”
4) Hourly charges-This is actually practiced in the USA or UK where planners charge per hour base. But as financial planning in India is still at a nascent stage. So no planner dares to charges you on hourly base.
5) Fee-Only Planners-The detailed explanation about this available here “Fee-Only or Fee-Based Financial Planners-Who is best for you?“.
Now coming to the main part of this post, that is how in India planners charge, recently one CFP wrote a fantastic post on how planners can charge their fees. The considerations of expenses are as below.
1) Planners Staff and Employee benefit he needs to offer to his staff-More staff or more salary means more fee on your head.
2) Office expenses like rent, stationary expenses, electricity and telephone expenses or printing expenses-Well few planners have such high end office that just by the location of the office you can assume the growth of the planner and the fee he charges 🙂
3) Financial Planning Software and Customer Relationship Management Software-These ranges from Rs.5,000 to Rs.2,00,000. So higher the software your planner using higher will be your fee.
4) Marketing Expenses-If your planner uses high end marketing tool to expand his business then the cost will be on your head.
5) Compliance Cost-I don’t think this varies from planner to planner. So there will not be any change in the cost consideration from planners. Because all need to abide by the regulators.
The above points are basic things discussed. But few planners have such high expectation from clients that they charge as per their wish. Now looking at above points before arriving at fee a planner can charge, you notice that it may vary from the lifestyle point of view of planners. Because few planners are so simple that they are within reach of their expenses. But few are lavish as they need to show the world they are planners who are out of the box product from that of agents.
So if a planner is actually providing you the quality of service by using the staff, office, softwares and the other expenses then it is acceptable. But why you as a client need to pay for planners lavish lifestyle? Hence you need to take a big caution while choosing the planner.