Cognito: Pricing a Financial Planning Engagement
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Pricing any financial plan can feel like a complete shot in the dark - you just met the client, you barely know anything about their situation, and you're trying to keep the cost fair while still getting paid for time spent.
The easy answer to this question is just to bill hourly, and track your time spent, while providing an estimated range to the client. But what happens when a *simple* plan actually ends up taking over 18 hours of your time, and you guesstimated 10-12 hours tops to the client? Under an open-ended contract like that, there's flexibility to go ahead and explain to the client that it took more time than estimated, and bill for the full 18 of course. The biggest issue here is just having documentation (time sheet, notes) for your time spent, and you're covered.
Some planners prefer not to keep time sheets, however. So how do you price an engagement? Read on to hear more about what works for us at Home Office.
The Approach
After a couple years of running plans, you start to get a feel for how much time different pieces take.
As a starting point, we separated out each 'category' of a comprehensive financial plan, and then listed out common topics that fall under each:
Income / Expense
| Budgeting | Productive Debt | Consumer Debt |
| Emergency Fund | Credit Score | General Advice |
Insurance / Estate Planning
| Life Insurance | Disability Insurance | Health Insurance |
| P&C Insurance | Excess Liability | LTC Insurance |
| Estate Planning Documents | General Advice |
|
Saving / Investing
| Vehicle Savings | Education Savings/Analysis | Taxable Savings |
| Asset Allocation | Overall Portfolio Health | General Advice |
Retirement
| Employer Retirement Accounts | Individual Retirement Accounts | Social Security Strategies |
| Overall Retirement Projection | Retirement Withdrawal Strategy | General Advice |
Other
| Charitable Giving | Tax Planning | Other General Advice |
Then, we estimated approximately how much time it takes to do the analysis + deliver recommendations for each piece. For example, building and delivering an Overall Retirement Projection is baseline 2 hours, but analyzing the savings rate necessary to afford a vehicle in 5 years is baseline half an hour.
From there *and this is the key to our approach*, we used career phase (ie early career vs mid, late or retired) as the complicating factor for each baseline time assumption for each piece. FOR EXAMPLE, overall retirement projections for an early career plan may only take 1.5 hours, as there are fewer assets and a much longer time horizon to make necessary adjustments; on the flip side, overall retirement projections for a late career plan could take 4+ hours, as there's virtually no time to make any adjustments if the plan is tight, and some difficult analysis and conversations need to be had.
Thus, each piece is more, equally, or less expensive based on the career phase. Obviously this isn't the only way to do it - I've had some people ask why not price it based on net worth, or liability balance or number of accounts or any other factor that could be used to represent the time cost on the advisors part. Over the years, however, we've consistently found that career phase is as good an indicator as anything.
A second key aspect to our approach would be that we limit the scope of the engagement, and not the time spent. Pricing using our tool is really geared towards aligning the fee to the service provided: the client tells us what questions they have (or we highlight critical pieces based on info provided in a preliminary questionnaire or GA meeting), and we charge specific to their situation.
The Cognito Pricing Tool
Cognito is essentially just a fancy Microsoft Excel sheet with a user-friendly interface. To that end, we have a form built out to assist in pricing engagements - you fill out the client's life phase and the pieces that will be covered in the plan, and it will spit out a recommended price. This can then be used in total for a project, or divided monthly or quarterly for ongoing.
Using the tool is simple, and my best advice is to use it to price a few past engagements and see what it comes up with. If that doesn't feel right for what actually happened, you can edit the baseline assumptions under the Inputs section in Build. These inputs can also be edited on a case by case basis inside the entry.
We'll provide a copy of this form on request!
Final Notes
There are three additional factors we've included for pricing purposes:
- Complexity Factor
- Business Owner Factor
- High Income Factor
The defaults for each of these are visible in the tool, but each essentially just adds a percentage to the fee under the assumption that these three things could make a plan take more time. For example, if you price a plan at $2,000, but the client owns a small business, you could include the Business Owner Factor which adds 10% to the total cost, making the recommended plan price is $2,200.
Before we were federally registered, CGN was audited at the state level. One of the auditors favorite pieces of our business happened to be the pricing tool - just utilizing this tool demonstrates consistency in pricing engagements that can protect you down the road.
As always, email Nicola@cgnadvisors.com with questions or submit a Help Ticket!