The advantages of hourly financial planning are becoming apparent to more people.  As more financial advisors slowly adopt this fee structure it is important to examine those advantages and how they serve clients better.  Let’s take a look at how hourly planning financial works, three important advantages, and the best candidates for hourly planning.

What is hourly financial planning?

Hourly financial planning is financial advice that is paid as a rate per hour.  This is monumentally different than the usual fee structures in this industry.  Currently, the most popular fee structure is based on the managed account value.  Before that, fees were commonly assessed as sales commissions on transactions.  Hourly planning is now making strides as an option for financial plans, but it still has a long, long way to go before it achieves dominance.  Frankly, it may never.

The time charged is usually based on the amount time taken to gather data and develop and deliver recommendations.  Some planners will give a free amount of time at the beginning of the relationship to give the client a chance to test the waters.

What are the three main advantages?

1. Unbiased advice – Hourly rates incentivize a planner to deliver the best possible advice.  They hope to sell more of their time to you in the future if you are satisfied.  An hourly arrangement is unbiased because they do not have any products to sell.  They also do not need you to have an account with investments.  In other words, you can ask for advice on student loans, real estate, taxes, estate planning, etc. without having to yield control over your investment account.
2. Transparency – The fee structure is very transparent because it is based strictly on one variable: time.  Commission-based fees are difficult to assess because the fees are netted out of your investment.  Commissions can be paid in different percentages depending on the complexity of the product sold.  There are also endless add-ons, called riders, which can change the fee structure, sometimes in a confusing way.  The transparency and simplicity of an hourly rate is a huge advantage. One caveat though: you have to trust them to reliably track their billable time.
3. They can create a comprehensive financial plan – An hourly advisor can cover a variety of topics that others may not be able to do.  A commission-based advisor is very likely to only sell you a product from a set list.  They cannot vary much from that.  An advisor who charges based on your account value is explicitly paid to manage the investments in that account.  They may offer to help you in areas of tax planning or estate planning, but they are doing it as a courtesy based on your account value.  An hourly planner can offer you advice on anything for which they have expertise.  They will also tell you if your questions are outside the scope of their knowledge.  This is fine because you are only paying them for the knowledge they have.  The less knowledge, the fewer hours they can bill.

Who are the best candidates for hourly financial planning?

1. Someone without a lot of investable assets – If you need financial advice on your debt, estate plan, real estate, or taxes, but do not have a large account with investable assets you will probably be ignored by most advisors.  An hourly planner will be happy to help because they derive no value from your net worth.
2. Someone who just has a specific list of questions – If you have a specific list of questions and simply need answers then an hourly planner is a great idea.  You ask your questions and provide background detail, get your answers, and you can move on at your will.  You do not need to commit investable assets for a long period of time just to get your answers.
3. A self-starter who just needs a guide – If you are capable of executing your plan, but need assurance that you are on the right path then this is a great fit.  You can periodically ask your questions when you need guidance and implement them yourself.  This is particularly useful if you go a long period without needing advice.

When you interview your hourly financial planner make sure to understand when the billable hours start, what the rate is, and get an estimate for the total amount of time it will take.  You will get a lot of value if you come prepared!