Matt: Thank you so much for joining the show today, Kara. It’s great to have you here.
Kara: Thanks for having me.
Matt: Let’s start off with a little bit more about you, Kara. Why don’t you just introduce yourself to our audience. How long have you been in the profession, and what inspired you to become a financial planner?
Kara: I started in financial planning in 2010. And honestly I didn’t know much about financial planning when I got into it. I had moved back to the Chicago land area. I was looking for what would be my first real job after college. And I interviewed with a firm that I wasn’t even sure exactly what they did at the time. But it turned out to be a really fortunate connection. I did move forward with a firm, an assets under management fee only financial planning firm in 2010. And I was there about five and a half years. And a wonderful experience where I learned a lot about both personal finance, personal financial planning, growing in knowledge of being a professional. I had great mentors there and learned about serving clients. So I started actually as a financial administrator, and then started serving clients over the course of my five and a half years there.
Matt: Very cool. And where are you currently working?
Kara: I am currently at an hourly financial planning firm located in Wheaton, Illinois, and it’s called Timothy Financial Counsel.
Matt: Before we dive into talking about hourly financial planning, I think that’s a great topic for this overall fee discussion that we’ve been having over the past month. But can you give us a little more background about what exactly Timothy does, what type of clients you serve, and a little bit more about that hourly fee model?
Kara: Timothy Financial serves clients who, I would say this. They’re not necessarily high level delegators from an investment perspective. When I’m thinking about this industry and when I was working in within an asset center management compensation model, I was basically working with the mass affluent. So we had an asset minimum, which is on the low side in some cases, but of a half million dollars. And we were charging in the ballpark of 1% of assets under management.
Kara: And there’s a lot of people who can’t be served in that sort of model. Our goal at Timothy Financial is to serve the unserved and the underserved. And when Mark Berg who founded the firm about 18 years ago, when he decided that he was going to go out on his own, and he was also with an assets under management firm, to start this sort of business, it was because he saw all these people who really needed solid, objective, fee only financial advice, and could not get it in other options that were out there.
Kara: So those people, they might actually have a number of assets saved. They might even have more than a half million or a million dollars in assets saved, but perhaps they are in a employer retirement plan that can’t be managed by an asset management firm. So they would not really qualify for those sorts of services.
Kara: Or maybe they actually are really high net worth, but are have very illiquid balance sheets, a lots of businesses or real estate. And there’s just a lot of people out there who would really benefit from holistic financial planning advice, but didn’t have a great way to access it before in a fee only model.
Kara: So that’s how we got started as a firm. Those clients then, I know your question was what clients we actually serve. So those clients, they can be anywhere from the couple that are both teachers down the street or have pensions through the state or federal governments, or private pensions. To again, someone with a really large balance sheet who maybe owns a lot of different businesses that are out there.
Kara: It’s a wide spectrum in terms of net worth because that isn’t necessarily relevant to the work that we’re providing to the client. But they are clients who are willing to be engaged in the process, and to implement things on their own. And some of that comes into play with investments specifically. So we do provide investment advice, and we can talk a little bit more about that maybe later on. But when we do provide investment advice, we’re working with clients to help them to develop a portfolio that makes sense for their risk tolerance, and for their cashflow needs at the time. And we do give specific investment recommendations that they should in different accounts go and buy or sell X fund in X dollar amount. But we don’t actually place the trades for them.
Kara: We don’t rebalance for them. We’re not connected to our clients’ accounts. So on the investment side in particular, the clients have to be engaged in that process and either willing to implement those things themselves, or get our coaching on how to implement them, or seek some help from their low cost brokerage platform to implement those things.
Kara: Or, there are cases too where they might be using us to help them even find an asset manager for certain parts of their portfolio. So that’s something that we do on that side too. But a person who wants someone who’s going to do all of the action steps for them would not necessarily be a good fit for us, would not actually be a good fit for us. But, people who are engaged in the financial planning process, willing to take the steps themselves. I talked about investments, but it could be in other things too. Seeking out life insurance. We would provide them advice on what fits well with their situation and what kind of products would actually meet their needs. And even connect them with resources to pursue that. But at the end of the day, our clients do go out and take the action steps themselves.
Matt: Yeah. And I think that makes a lot of sense with the fact that you’re billing by the hour. I assume that you design it to be more they’re implementing these things to keep their fee lower. Correct?
Kara: Right. That’s part of it for sure. And it’s just that they know exactly what they’re paying for. And from us, what they’re paying for is that holistic advice or advice in the areas that we have talked about in the scope of our engagement. And it’s always the client’s decision then what they do with that advice.
Kara: And just to contrast with my previous experience in an asset center management model, I have found that because clients are very aware of what they’re paying for in terms of paying us for our time and holistic advice, that they seem more engaged and are at least anecdotally seem more ready to take action on the advice. Because they valued it enough to lay out potentially thousands of dollars on the front end for the initial financial planning engagement. And they really want to stay on track and have someone help them do that.
Matt: It always helps to have clients have them have skin in the game to get them to take action on those steps however they choose. So when you’re talking about thousands of dollars, what exactly is the hourly rate that Timothy charges for financial planning?
Kara: So our firm’s standard hourly rate today is $280 an hour. But that is for what we call, our complexity level is one through four. We have five levels of complexity, and level five clients are just a lot more intricate and take a lot more time. And the hourly rate is higher at $400 an hour. And Mark Berg, the founder is the primary advisor for most of those clients.
Kara: So those are the two different rates. But how that ends up playing out in how we actually work with clients is that our initial financial planning engagement looks a lot like probably other firms that are going through this process. Most of our clients are looking for some sort of holistic financial plan either in a comprehensive way where we end up covering both retirement and cashflow, investments, insurance, estate planning. Or some subset of that in a little bit more narrowed scope on the front end.
Kara: But when we go through that process, we gather a lot of data from the clients on the front end from the prospective client. And then we sit down with them. And in our initial complimentary meeting with them, we get more information about their goals and who they are, and also get a little bit more information about the data that we’ve collected. And at the end of that meeting, we provide a firm quote to prospective clients for what it would cost to move forward with us with this initial financial planning engagement. And I mentioned levels one through four.
Kara: So on our websites, on our fees page, it’s laid out very clearly this range of costs for these different levels of complexity. And when a prospective client initially calls in and just is investigating our firm, maybe they referred to us or they ran across our website. We can even in a pretty brief phone call, give them an idea of that range of cost to move forward with us on the front end. And most people end up fitting into a level two or level three complexity level, but we have people across all complexity levels.
Kara: And those costs, just to give you an idea, so level three is from 15 to 30 hours. So we’re talking about starting at $4,200 or so, up to $8,400 for that initial plan cost.
Kara: But that’s just one level. There’s again, four different of our standard levels of complexity. But that’s all based on how much time we actually expect it to take to build an initial plan for that client. It’s very dependent on their situation. It’s also dependent on how many areas of advice we’re going to get into.
Kara: Not every client that comes in is looking for advice in estate planning, for example. So we might get into that area of advice in the initial engagement. But we quote the client like I said, and then they decide whether or not to move forward with us at the cost that we have provided to them. It’s a firm quote. So if we go over that time, then they know exactly what they’re paying for. And then when we work with clients on an ongoing basis, I’m going to come back to that because I think that is something that many people find unusual or they didn’t expect to be true of an hourly financial planning firm is that we have, most of our revenue actually comes from ongoing client work.
Kara: But when people do come back for an update annually or semiannually, whatever schedule we determined together, they’re going to be paying only for the time that we’re actually using. So we do a firm quote at the beginning, but then we are running a timer always in our hourly financial planning firm. And we will just build them for the time we actually spend working with them throughout the year.
Matt: You were getting into the ranges there. Are there any qualifying or disqualifying factors for fitting into a particular level? How do you even get started with you’re level two, and then from there we go to range? So what does that initial qualification to land at level two, or just as an example?
Kara: So we go through and number of just initial get to know you questions on that introductory phone call. Some of the things that would, maybe I’ll start with a level one, because sometimes people will call in and say, “I’m very simple, so I think I’m a level one.”
Matt: They always are right?
Kara: Right, exactly. Everyone thinks their situation is simple. But, I actually had this happen the other day. The person is married, they actually have some self employment income. Both spouses are working. There were also some restricted stock units and things that we needed to be working with. That person is not a level one.
Kara: So a level one ends up being most typically either someone who is retired who is already in distribution mode. And maybe is single. A lot of times level one clients are single individuals. They might also be on the younger end of life. We can talk a little bit about, we do have a next gen planning service that is a little bit different as well. But they might be on the younger end of life. And again, either single or married, but just single income. And not a lot of complexity in terms of the accounts or account types they have. Probably limited investment advice. Maybe we’re looking only at a 401(k) or something there. And something that would just again push you out of this level one is if somebody had a lot of different permanent insurance policies or probably even one or two. That’s going to start to push us already into level two.
Kara: So when you’re talking to someone on the phone who actually is a level one, that person doesn’t have much from a complexity standpoint, that would push them up the level. So it’s a W-2 employee with simple employer provided benefits, and they want to do some cashflow planning. Or they’re coming in, they may still be someone who if again, probably a single person but coming up to retirement. But just no other complicating factors. Maybe they’re debt free. A lot of things are very straightforward, but maybe they still want to verify their longterm retirement projections. And we can work with them on that.
Matt: This is a huge reason of why I’m so fascinated with what you guys are doing at Timothy. So frequently in my experience as a paraplanner, I see what I like to call service creep where advisors are giving more value or more time and expertise than they are actually being compensated for. So I love that you’re using those levels to just give the client an easy way to understand where they land.
Matt: Now when it comes to those ranges, again we see in some of these levels $4,000 of difference. What exactly would push someone one way or the other towards those boundaries when they’re in a level three relationship?
Kara: We just on our website simplify four different areas of advice. Starting with our cashflow and retirement planning, which is where we build holistic financial planning projections. We use eMoney as our financial planning program for that. And that’s where a lot of the time goes in, is actually building this cashflow model for the client.
Kara: So that’s the first thing is what do they have going into that cashflow model. Maybe they have rental properties or something. And we need to model a number of different schedules related to that, or they might have more complex employer provided benefits. We’re talking about maybe RSUs and stock options, or maybe they have deferred compensation. Just the more things that we start with in terms of what we need to model, add time in the picture. So again, a small business owner is going to take more time to model their situation than a person who is a W-2 employee at one company with a fixed salary.
Kara: So that matters. It also matters how of those areas of advice we get into, which is what I was starting to mention earlier. So the cashflow and retirement counsel is the first one. The second one is in investment analysis and recommendations. The third is risk management, and the fourth is estate planning, counsel, and design. So the more of those areas of advice that this initial financial planning engagement will encompass, that is going to push a person towards the bottom or top of the range as well. So which areas of advice are we actually getting into, and then how many facets are there to their financial situation.
Kara: I didn’t really talk about this, but just investment account wise. If someone comes in and they want investment analysis and advice as part of their financial planning engagement, and there are 25 different accounts all over the place, or there’s some large taxable accounts that we need to do more tax planning in terms of thinking about how we might even recommend changes to the account. It all adds complexity to what we’re doing on the front end especially. And that just adds time. And we have been doing this a long time. I’ve been with the firm for a little over three years, but Mark, and Hoan Taussig is one of the other partners at the firm. They’ve been doing hourly financial planning the whole time.
Kara: And we’ve been quoting clients, we’ve just had many, many years of quoting clients on the front end based on the time it takes us. And we can help them to gauge like I said towards the beginning of that process, at least what the range is. And then it’s in that initial, I’m going to call it a face to face meeting or virtual meeting, where we actually give that firm a quote, and then they are going to get the best understanding of where they actually are in that range. And part of that is based on their data, and part of it again is based on them and what they want to include as part of the initial engagement with us.
Matt: Again, we can have the same clients on paper, but they can be two completely different situations. So are you factoring in any personal traits of the client? Like this person’s going to be really difficult to coordinate with getting data from. Are you factoring that into that projection?
Kara: Not necessarily. I want to be careful in how I answer that question. There’s a lot of things that I just know how long that they take. And a lot of times in that initial meeting, you actually don’t know yet whether the client is going to be challenging to get data from or not. But if there was something that indicated that, like there was a lot of challenging back and forth to get the data for this initial meeting with the prospective clients. That could be something that might within not a really wide range, but within an hour or so that could impact that. Our goal is really for the quote to actually be how much time it takes. We do actually want to be working within the quote. Anytime that we’re going over what we quote to clients, we’re eating that cost. That’s revenue we’re not getting for work that we’re doing.
Kara: So yeah, we can and we have, I guess taken that into consideration. But just from my experience so far, a lot of times when there are those challenges, I don’t know yet when I’m providing the quote.
Matt: That makes a lot of sense. And this is more of a question for the audience, but when you’re quoting these fees, you give them this firm quote or this range. How are you communicating that to clients? Do you have any best practices or tips for someone who might be looking to implement this into their firm?
Kara: One thing I really love about this model is that like I had mentioned earlier, I think that the clients know what they’re paying for. So when we are going through this initial process, and I’d especially say that’s true once they’ve come on board and they’ve actually gone through the process. If you’ve never been through a financial planning process even with really excellent communication, it can be difficult to know what it’s like until you’ve actually gone through it yourself. But when clients have gone through that process, they see the value in the work that we are doing, in the advice that we’re providing for them. And something that I have seen in the industry, because you can see on our website $280 an hour as our standard firm rate right now. That’s not the cheapest advice that’s out there. You can find other advisory firms that have lower rates than that.
Kara: But our close rates for clients are still quite high, certainly over 80%. So when we’re in that place, we want to make sure we’re bringing on clients who do understand the value of financial planning advice, and that that’s what they want.
Kara: So I think I’m freed by, maybe you might be looking at that number and thinking wow, $8,000 for an initial financial plan. But I think about it in a couple of ways. For some people, it’s actually much cheaper than what they could get elsewhere.
Kara: So we do serve clients of a wider range of net worth, like I said. And if someone were working with an asset center management firm, and many of these clients that we work with could be, but they actually don’t want to have someone who’s placed trades for them and is in between them and their implementation, and funds.
Kara: So those clients, even if you have $1 million, and we’re talking about 1% asset center management fee. Well that’s $10,000 a year. And we’re talking about starting out with an initial financial planning engagement that’s for many people that come in and work with our firm, less than $10,000 in the first year. And then when we’re working with clients on an ongoing basis, it’s not the same cost every single year. This is the cost to really go through that initial financial planning process. But once people have come on board as clients and we have a good understanding of them as people, and of their goals, and of all these different facets of their situation, we’re able to meet with them again on an annual basis or again, whatever schedule you’ve come up with. And it’s not going to take as much time.
Kara: Just like for anyone. It always takes longer to get to know a client and to do your initial analysis of their situation. So in a future year, it might be more like a fourth to a third of the initial plan cost, or they might just call up mid year and have a question, and want to talk for 12 minutes. And we’re going to bill them for that 12 minutes of time.
Kara: So for some people, it’s actually more cost effective to receive advice in this fashion. You feel it differently because our clients are writing us checks or sending an electronic payment. And it’s not just coming out of their investment accounts. So it definitely has a different feel to it. And that’s something that our clients value about working with us or working in an hourly context is that they’re only paying us when we’re actually doing work for them. There’s a lot of other ways to do business, but this is the only way I know of in which the clients know that when they’re getting billed, we have done work for them. They’re directly related on the time that we’re spending with them.
Kara: But in terms of that cost and value, Mark talks about this often just that it’s important for us to value the services that we are providing to the clients. And it’s something that I really appreciate about this whole model and getting to communicate with clients this way. Is that I do know that when a client comes in and we’re talking through the different ways that we can serve them, I am confident that they are going to receive … if they end up paying $8,000, that we’re going to get to the end of that process and they’re going to look back and say, “Man, that was $8,000 well spent.”
Kara: Because they had questions that they couldn’t answer on their own, or they didn’t have confidence that their answers were the right, I’m saying the right ones. But with the big question of can I retire or when can I retire? That’s a huge question. I mean, it’s a simple question, but it’s a huge question. Our clients who are coming up on a retirement transition especially, they’ve often been doing so many wonderful things to prepare for that. They’ve been good savers, they’ve been good at paying down debt. They’re setting themselves up really well. But there’s still something about having a professional who’s doing this day in and day out, come in with an objective set of eyes and evaluate your situation, and be able to either validate for you that yes, you’re on track. Or let you know that some changes need to be made to actually hit the goals and do the things that they would want to do, to be able to make that retirement transition.
Kara: And without fail, clients come in and there’s typically an opportunity or something they haven’t thought of yet that would just help to better optimize their longterm situation. And a lot of times that comes into play with tax planning. Because as you know, there’s just a lot of facets to financial planning. Putting all these pieces together when you’re an individual doing it in your own life, and this is true in my own life. I come up to one decision and then another decision, and I just try to make the best decision that I can each time. But I’m doing that one at a time. And having someone come alongside you, step back and look at the big picture and see how best all of the pieces fit together in light of your goals and plans. And help you to have confidence that you’re doing the right thing or there’s some other things that you could be thinking about or doing that would maybe be even better. That is really valuable. And clients who come on board with us, they’ve made the decision that this is what I want.
Kara: Sometimes clients will say, or prospective clients will ask, “Are you going to be able to save me money here and there and whatever, to kind of pay myself back for some of this.” And I’ll just tell you that sometimes happens, but when I’m talking to prospective clients, I tell them I cannot promise you that that would be the case. What you’re paying for, varies a little bit how I communicate this with them, depending on what they’re looking for. But what they’re paying for is to get that validation or to answer the big question or the set of questions that they had. And that’s what that $8,000 or whatever that initial plan engagement is, that’s what that cost is. It’s for that. If they didn’t want an outside party to do that, they could be pursuing those things themselves. But they don’t want to, it’s that professional to partner with them in that, that they’re looking for.
Matt: Yeah, of course. And I think it’s really interesting you brought up tax planning. So I’m just curious with maybe a client who’s already been through the process, how does this model work with a big tax change like we saw in 2018? Did that create more time for each client in that year? How was that handled?
Kara: That’s a great question. So I guess one thing that is, for people who are coming into the industry and you’re thinking about how do these different models work? Well, something about the hourly model is that it’s harder to be proactive with clients. Because they pay me for the time that I spend on them. So a lot of things with the clients, a lot of engagements with them are initiated by the client. Now we have set up just in terms of I mentioned an annual review process earlier, and we have set it up so that we will once we’ve decided on the cadence for when we’re meeting with them, just send an email asking if they’re ready to do that. A reminder basically, are we going to move forward with that update? And then once they agree, then we actually start working on that for them.
Kara: But in something that we can’t control, and that’s one reason why having consistent updates is really important I think in a financial planning relationship. Is because tKara: So there are clients that I met with in 2016, or even in 2017 where once we knew what the changes in the tax law were, the next time we met, we needed to adjust our recommendations, what they were going to be doing that year or the next several years. In terms of when it actually happened at the end of 2017, the way that we handled that is that we basically prepped a primer for our clients on the changes, like many other financial advisory firms. And then we did communicate, we sent out an update newsletter email blast to all of our clients. Gave them the headlines of those changes, gave them some general ideas. And essentially said if they wanted to talk more about it at the end of 2017 year end, then they could call us. But we can’t make our clients come to us for advice.
Kara: So that is a challenge if clients aren’t engaged, but most of our clients are engaged, and are in a regular pattern of working with us. So even if a client because they didn’t take any actions at the end of 2017, they may have missed out on a small tax planning opportunity there, depending on their situation. But the next time that we met with them, we’re still incorporating, just like any other financial planner. We’re still incorporating the changes into our new recommendations with them. And it’s things like that, that are exactly why again, I encourage our clients to be in a consistent relationship, because things do change.
Matt: Yeah, that makes a lot of sense. So you’re really just doing your clients a courtesy to say, “Hey, here’s a summary of what happened. And if you feel concerned about it, then you can come and pay us.”
Matt: Again, it just helps you provide what they exactly need, not trying to give them something they don’t. So just shifting gears a little more, obviously the firm, there’s a team of advisors there. So from the advisor standpoint, how does it work if say I’m working on someone else’s case? Because you bill hourly, so I would assume that the hours you billed for the case, you’re compensated for in salary or however that works. So what does that look like just to give the listeners a little insight there.
Kara: Sure, that’s a great question. And you’re exactly right. We are compensated for working on other advisors’ clients. All of the clients when we’re bringing them on, we talk to them about how we work as a team. And that’s one of the things that we value a lot and we think is one of the reasons why we’re able to serve clients well and even to keep growing to be able to serve new clients.
Kara: But, we want to be working on each other’s clients. We want to be strategizing together so that any client isn’t just getting my expertise with my years of experience, but the collective expertise of our team, and the collective experiences of our team.
Kara: So that’s actually something that is pretty I’m going to say uncommon amongst hourly planners. Mot hourly planning firms tend to be smaller in terms of number of staff. And we have nine staff people today. Seven of us work directly with clients, in some cases as primary advisors. So when we are doing that work, I might take on a level three client. But Michael Thrasher, who’s one of the partners of the firm and is the lead advisor on a lot of clients himself. We might take some time and strategize together, or Michael is a CPA as well. So we use a pretty sophisticated tax planning software and we’re working out some specific problems. But there’s a lot of times when I want to bounce ideas off of him, and vice versa. We all have different, I’m going to say niche areas of expertise. But a lot of it has just come down to the types of clients we’ve served.
Kara: I have a lot of experience with a certain pension plans in our firm just because again, of the clients that have come in. So we’re going to each other to get feedback and make sure that we are providing our clients with the best set of advice from our team, not just from one person.
Kara: So when we’re going through the initial planning process, there’s usually at least three people who have done some work on the plan. And then for ongoing work, there are often other people involved at different points of the process. And those people, they are on our side for how we are tracking our time. They are billing hours on my client when they’re working on that client. But they’re still getting “credit” for that on their end.
Kara: And the reason this works so well is because we’ve designed it to work in this team environment. So I also bill hours on other people’s clients. We want our work to be spread around in that way so that we’re familiar with each other’s clients. That again, the clients are getting that best collective set of advice. And it incentivizes us to just be able to serve the clients of the firm and serve our team members too because we’re compensated. Or, rather we are getting credit for those hours in that way.
Kara: We have goals related to the hours that we bill in a year. So we’re certainly striving to meet those goals. But I think working in this way removes a lot of the potential for competition, I guess just amongst the firm. And we’ve been at a really fortunate place to have plenty of work to go around. We’re really thankful, and there are a lot of people who are seeking out hourly financial planning advice. More and more people are coming to us by simply googling that, or looking up something like that. Like hourly financial planning advice, and finding our firm, and reading our website, and being interested in what we provide. So we want to continue to be able to do that, to serve more and more clients that way, and to do so in a team environment.
Matt: My final question is surrounding the team concept. Are you all delegating or spreading out some of the common tasks like performing research on investments, performing research into the assumptions that are going into the financial plan? Are you delegating common tasks like that to specific members of the team, or just shared based on your expertise?
Kara: That’s a good question too. So right now, we have four partners in the firm. They take on a number of responsibilities that are firm level decisions that need to be made in the realm of financial planning and how we’re going to be serving clients that way.
Kara: We do also have an investment committee. I am on the investment committee. There are three other members of the investment committee. Our job is to work on again, building the portfolio targets for our firm to recommend to clients. And that’s not an overhaul every single year, but doing our due diligence on the funds that we are recommending, or the ETFs that we’re recommending and seeing if there are other better options that are out there. We use a portfolio analysis tool that is a help to us in that. We also use some other outside research that we subscribe to. To again, assist us in that work.
Kara: But that’s an example of a non-billable responsibility that is kind of split among different members of the team. And even those of us that are not owners at the firm, we are all seeking to contribute to the good of the team and the work of serving our clients in some way that is going to be a non-billable capacity.
Kara: Because there are other responsibilities to go around. But we do try to, not every individual needs to go out and do that research. We want to limit that to a small group of people.
Matt: And then I would assume that the findings of whatever project you’re working on, let’s just say the investment committee, that’s communicated to clients in a similar manner where, “Hey, we had these findings and this is what you need to know. Contact us if necessary.”
Kara: Exactly. You’re exactly right. And on the financial planning side, it’s very, on the longterm projection side I should say. It’s very similar. If we’re making a change to, there are sometimes reasons to not use what would be our standard default assumption in some area, but we want to be using on the whole a consistent set of assumptions when we’re building financial planning projections, so that we’re able to communicate in very similar ways to our clients. Because of course there’s different individual personalities and things like that on our team. But one of our goals is for every client that comes into our firm to receive very consistent advice regardless of who their primary advisor is.
Matt: Thank you so much for being on the show today, Kara. We’ve really enjoyed hearing more about this hourly model at Timothy Financial. I would highly encourage any listeners to go check out their website and just see what they’ve built out. It’s really fascinating. But thank you again for joining us.
Kara: Thanks for having me, Matt.