Hourly pricing model has benefits — and pitfalls

Twenty years ago, when Sheryl Garrett launched a financial advisory practice that charged clients by the hour, "people thought it was insane," she recalls. Although some might still question the hourly pricing model for financial advice, it would be difficult to deny the success of what has become the Garrett Planning Network, which includes more than 250 advisers subscribing to the hourly fee structure. "When I first started, I was getting as many calls from other advisers as I was from prospective clients," said Ms. Garrett, who now acts as a coach, mentor and spokeswoman for her business. She stopped working with individual clients in 2005 but said most hourly planners are still charging what she was charging back then — $240 per hour. "You want your hourly fee to be divisible by 60," she said, pointing out that charging hourly fees often means billing like an attorney. "If I don't want to take on the aspect of a project, like filling out a form online for a client, I explain that it will cost them $4 per minute for something they could do themselves," she said. Like most models that deviate from asset-based pricing, hourly fees have the advantage that people don't have to be rich to be clients. A potential downside, Ms. Garrett admits, is that client relationships aren't as long-lasting. "There are a lot of introductory meetings at first, and that's the scary part," she said. "I did have a handful of folks who came and used my services once." The standard Garrett Planning formula typically begins with two hours for the initial consultation and review, and another hour to write up the report. (More: Why the AUM fee model is so dominant) The one thing Ms. Garrett tells anyone embracing hourly fees is to avoid quoting the hourly rate to clients. "When someone asks about your hourly rate, they really want to know how much it will cost them," she said. "The ultimate cost will be different depending on what the client needs."