Don’t Fear the Meter: The Inescapable Future for the Hourly Revenue Model

Recently, industry consultant Matthew Jackson of Dialektic Consulting and long-time advisor Mark Berg of Timothy Financial in Wheaton, IL co-authored a book that offers some advice to any advisors who happen to charge by the hour, and any newbies who think they might prefer that model as they enter the profession. It’s called A Matter of Time. The book offers practice management tips, cautions about common missteps in running an hourly planning firm, and lists a surprising number of advantages that the hourly model offers over rival revenue models.

The hourly discussion – and the book – are directly relevant to that 2% of the planning community who are already charging by the hour and another small percentage of advisors who are experimenting with an hourly model for clients who don’t have the “A” that they can charge AUM on. But I suspect there’s a sly double meaning to the book’s title, as in: it is ‘a matter of time’ before all advisory firms will need this information. As I read through the book, I found myself remembering conversations with Gen-Z consumers where I would ask about the AUM revenue model, and often they would laugh at the ridiculousness that somebody would pay an advisor that way. Last time I checked, those were the financial planning clients of the future.

The migration from AUM to something else will come sooner than advisors realize. Advisors should see A Matter of Time as a path forward to the revenue model that is the way all other professionals charge their clients and customers.

Hourly myths

The book begins by systematically addressing some of what the authors believe are myths about the hourly model – beliefs that have become ingrained in the profession which, in the experience of actual hourly planners like Berg, are not true.

It’s a long list.

Many writers (including me) have opined that advisory firms who have primarily charged via AUM should open their doors to less wealthy clients and work with them under some other revenue model – including hourly. The resulting myth that has taken hold is that hourly is only appropriate for those clients who don’t have enough revenues to pay by AUM. This is not typically how the discussion is framed, but if advisors are adding hourly to AUM, that is almost certainly how they view things.

The book suggests – and this is certainly true – that any client can be served on an hourly model--even clients with large, complicated portfolios. Berg himself bought into the “only appropriate for unwealthy clients” myth when he started Timothy Financial. “Everybody was telling me that my hourly model was going to translate into the middle market – that that was the only clients we were going to attract,” he says. “And that was fine with me. An hour is an hour, so if we were going to work with the low end of the mass affluent, I was happy to serve that group.”

Today, Timothy Financial categorizes clients according to five levels, which are not determined by net worth or assets, although they do tend to loosely follow those numbers.

Level ones are relatively simple cases, often clients who are below mass-affluent, and these cases are ably handled by less experienced staff.

The mid-level clients – many of whom would be enviable clients for any AUM-compensated planning firm – are handled at $300 an hour by increasingly experienced staff. (The more experienced, the more complex cases they are handed.)

Berg mostly specializes in the level fives – ultra-complex clients with net a worth north of $20 million. “I talked last week with an individual who is the CEO of a publicly-traded company,” he says. “His family was the founder of the company, pre-IPO, and he’s worth a couple hundred million dollars, brilliant guy, has a great team of attorneys and CPAs working on his finances. Another call this week came from an individual worth $250 million," Berg adds, "who has his own family office, with its own CFO, CEO and CIO, plus the staff that manages all his personal stuff.”

In both cases, Berg asked them, “Why are you calling us? What are you missing?”

“Both of them told me: I have these experts, the CPA, best-in-class attorney, people paying my bills and doing other things,” says Berg. “But nobody is connecting all the dots, bringing it all together. I’ve been looking for that role and haven’t been able to find it, because everybody I talk to sees my balance sheet and immediately says, okay, we can manage your assets.” Then, Berg continues, “they say to me: why would I pay even 20 basis points on $250 million, when that’s not what I need? It’s like," he says, "they’re telling our own commercial back to us. They’re saying: the models that are out there don’t fit what our need is.”

Later in the interview, Berg adds that his firm’s mission statement is to provide planning services to the ”underserved and the unserved.” “We love the fact that we can work with the level ones,” he says, “and provide excellent advice to them, and we joyfully do it. But we can also work with these level fives, where, even though they have access to best-in-class mainstream planners, the model doesn’t fit their needs. The underserved and unserved,” he adds, “doesn’t necessarily translate the way you would initially think.”

A number of mainstream advisory firms may be attracted to the book because they’ve taken my own advice and created an internal skunkworks that will offer financial planning to a wider assortment of non-wealthy clients, while still charging AUM to the people who have assets to manage.

Co-author Jackson is skeptical that these arrangements will work, long-term. More specifically, he thinks hourly and AUM are uncertain bedfellows, less compatible than, say, AUM and fixed quarterly fees.

“I’ve done a fair amount of thinking about this,” he says, “and I think, for most firms, the cognitive dissonance would be very difficult to manage. Having such different revenue models could end up cannibalizing your main business, as people start asking: why would you not be serving all of your clients this way?”

Don’t fear the meter

Another myth that the book addresses is that clients are highly conscious of ”the meter running,” and are reluctant to pick up the phone (or, these days, Zoom) with updates or requests. The book suggests that clients either trust you or they don’t; they see value in your time or not. Clients who see the value of the hourly advisor’s advice should, at least in theory, be no more reluctant to boot up Zoom than they would be booking an appointment with a personal trainer, attorney or accountant.

Related to that, of course, is the conflict-of-interest issue: Hourly advisors have an incentive to run that meter a bit longer than absolutely necessary and work inefficiently – padding their hours and, therefore, getting paid more.

The ”meter running” myth rests on the hidden assumption that the relationship with the client is a transactional one – that is, that the client is paying for a project, a financial plan, rather than entering into a long-term relationship like they do with AUM firms.

“If you and the client are in a transactional relationship, then I totally agree with this objection,” says Berg. “But financial planning is not a transactional activity; it’s a professional relationship.”

Isn’t the hourly relationship, by its nature, transactional? Isn’t the hourly planner dispensing advice on an ad hoc basis?

Of course, it could work that way, but Berg says that it doesn’t have to. Timothy financial gives investment advice but doesn’t manage assets – and that allows the firm to give advice on the overall financial picture, whether the money is in a brokerage account, an IRA, or a 401(k). Yes, some people will knock on the firm’s doors looking for transactional advice about their portfolios. “We’ve had people call us,” says Berg, “and say, hey, I heard about you, I have $4 million, and I have to imagine that it would cost me infinitely less to get your advice over the phone than what I’m paying now to have my assets managed.”

Berg’s response: “We will not do that outside of a financial planning relationship. We build a financial plan. Before we give any advice, we understand your taxes, your cash flow needs, your risk.”

The response on the other end of the phone: “Oh, no, no, I don’t need all that. I’m just looking for some quick portfolio advice.”

Berg: “That’s not us. You’ll have to keep searching. That’s not our value proposition.”

Jackson points out that people don’t seem to object to the meter running when they engage lawyers or accountants. The meter runs in every other mature profession; it shouldn’t be an obstacle in the planning profession.

In fact, he argues that the hourly model tends to attract planners who think more like professionals and less like salespeople. I’m sure I’m not the only person who has noticed that even the fee-only planning profession is still full of terminology that comes straight from the sales model, terms like ”close rate,” ”gathering assets,” and referring to someone as a ”$10 million client.” I have described the AUM model as ”commissions in drag,” and it does closely mirror the old C-share sales model.

“You can be a great salesperson and make a great living under the AUM model,” says Jackson. “But hourly selects for the sort of planner who would typically consider law or accounting or medicine, people with a true professional mindset. It is all about the expertise; that’s what you have to offer.”

Berg says that, in his experience, the ”padding hours” issue tends to self-monitor. “If we were excessively billing,” he says, “and the clients are questioning the bill (which we almost never get), then that gives us an opportunity to explain, this is what we did, and this is how we got to where we’re at. The clock runs when we’re doing work for a client, and it’s turned off when we’re not,” he adds. “It’s very easy to show those details.”

A related myth is that it is somehow wrong to charge more fees during difficult or stressful times in clients’ lives than when things are going along smoothly. But these are the times when the hourly planner becomes more important in their clients’ lives. The book says that it is precisely because advisors are adding value at a difficult time that their fees are warranted and earned.

Berg sees this as an advantage, not a drawback. “The beauty of hourly,” he says, “is that it self-regulates. When things get busy for a client, or when it gets easy, the fees go up or down based on actual time.”

Jackson recently switched to hourly fees for his business consulting work for financial advisory firms, and he says that the new revenue model created a number of beneficial changes. “When I moved to hourly, there was a qualitative change in the way I thought about things,” he says.

In one example, he had been occasionally playing video games in his spare time. “I wasn’t spending hours a day on it, but it is not a great way to spend your time,” he says. “Since tracking my time, I haven’t played a single minute of a video game,” Jackson reports. “You start thinking about your time in a different way, and you see that it is actually quite limited.”

Beyond that, moving from project-based fees removed one of the more annoying issues about being a consultant (or, for that matter, a planner): you spend a lot of time up-front trying to impress someone who might then sign on for a significant engagement. “I got a call from someone who was setting up a new firm,” says Jackson. He said, “I have this idea for a pricing model. What do you think?”

“Pricing is a very complicated issue,” Jackson continues. “It can be a never-ending process, with so many things to consider. So I said, I’d be happy to work with you. Here’s my rate.”

The advisor came back with: “I don’t think I’m ready for consulting just yet.” And then he sent Jackson a long email saying: Here is my pricing. What do you think?

“I said,” says Jackson, “that I’d be happy to work with him. This is my rate. I haven’t heard from him since. If I was charging project-based fees, I would have given him more of my time trying to get the engagement. So much of your time as a consultant, and sometimes as a planner, is spent having conversations with people when it is not clear if there is an actual opportunity. Hourly pricing clarifies the situation beautifully and simply.”

Jackson has found another benefit that relates to planners as well as consultants. “In a relationship where there is an AUM or retainer,” he says, “the client will have you do everything, whatever it is, because they’re paying you the same either way. But with hourly,” he adds, “I’m finding that they do the work that they are capable of doing, and only have me do what they need me for.”

Is that all? A final benefit is that the hourly model gives the client much more control over the relationship. They can pick up the phone or not. “I was speaking with somebody yesterday and he put down the phone after seven minutes, because he had what he wanted,” says Jackson. “He was only liable for seven over 60 times my hourly rate. Most clients aren’t used to being in control,” says Jackson. “But when they realize that they’re in complete control with the hourly model, they tend to prefer it.”

Time-tracking technology

The clock-running comment introduces another of what the book labels as a myth: Time tracking is a nightmare to implement. Obviously, the hourly model requires fairly precise tracking of time spent with each client, and most advisors think this requires hours of filling out time sheets, trying to remember how they spent every minute of the day. The book points out that attorneys and accounts track their time, and this doesn’t seem to crush their souls or otherwise get in the way of their business lives.

With modern technology, Berg says that each person on his staff is able to take about 10 minutes a day to enter in their times for clients – and, importantly, they also enter the non-billable time that they’re spending, which opens up a lot of additional management possibilities that are only possible in the hourly model.

“If you were looking at my screen right now,” he says, “you would see my weekly timesheet through GetMyTime, and it syncs with Quickbooks, which is our accounting software. I signed on a new client two days ago,” he adds, “and when the meeting started, I clicked ‘start.’ When the meeting ended, I hit ‘stop.’ Later on, when I started doing my summary notes for the client, I hit ‘start.’ When I was done, I hit ‘stop.’ At the end of the day, I’d look and see if I tracked eight hours. If not, then I’ll think through, what are the non-billable things I did today, whether it was personal or I sat with my staff to talk about business planning, or whatever.”

The result is a Quickbooks report that shows every minute every advisor worked with a client, and the system knows each person’s billing rate. Quickbooks generates the monthly invoices to clients.

Management tool

Anyone reading A Matter of Time would come away with a blueprint for how to use the information you get from having the staff track time – and the real impact of the book might be to convince AUM firms that time tracking could boost the effectiveness of their internal management. It talks about one professional who, looking at the time data, discovered that he accounted for 60% of his (reasonably large) firm’s billable hours. That told him it’s past time for the advisors on staff to take on more client-facing roles.

The book suggests that advisors should ideally be billing 60% to 70% of their time, roughly 1,200 hours a year, and if they start to move up toward the 80% threshold, that’s an advance warning that the firm will need to hire new talent. If the staff is billing down in the 50% (or below) range, then the firm may have inefficient processes. If the founder and primary advisor is billing below 60%, that means he or she is under-delegating, handling office tasks that should be on somebody else’s desk.

Of course, when the hourly firm looks at billable hours, it makes it easier to judge appropriate staff compensation. The hourly firm will typically follow other professional organizations, where there is a hierarchy of salaries that is tied to the contribution to the firm, plus bonuses and profit sharing for those elected partners. The book recommends some very simple time-tracking categories; for billable hours, you have client meetings and other time spent on work on behalf of clients.

Jackson believes that tracking non-billable hours can prove at least as enlightening as the billable tracking. “It is not something I’m pushing with my consulting clients,” he says, “but time tracking gives you a much better handle on the activities actually help determine the long-term future of your firm.”

How so? The health of a firm requires that the leaders and staff spend time on business planning and continuing education, on strategy, training, mentoring, recruiting and marketing. “Everything to do with the long-term growth of your firm happens in that non-billable space,” says Berg. “If you know how much time you’re spending on those things, and whether suddenly the time spent on any of them is dropping off, just having that information offers a wealth of management potential and insight.”

Berg cites the example of a partner in his firm who, the numbers showed, was becoming less productive. “I noticed that her billable hours were down, but I was also able to see that her admin time was pretty high. I asked her: What accounts for that?

She said that she had been spending a lot of time lately tending to the firm's tech stack and managing the server.

“I said, why are we having you do that? Let’s find somebody to do that for you, and we did. We pay our technology consultant $65 an hour,” says Berg, “and we’re billing this person at $300 to $600.” The difference between what Timothy Financial paid the tech consultant and what the planner and partner was able to bill with those additional hours was pure profit to the firm. “It’s an easy calculus for us to outsource,” Berg says.

Of course, tracking time also clarifies how the work done relates to the fees collected. This is precisely straightforward under the hourly model, but when a firm is charging AUM fees, it’s often hard to tell how much time clients are getting from the firm compared to what they’re paying. It may have a client with $10 million in assets on whom the firm is spending, cumulatively, 15 hours a year. Another client may have $1 million under management and using up 100 hours a year.

“Most firms don’t actually know this because it isn’t tracked,” says Berg. “If they tracked their time, they might fire some clients. They might say, I would rather take that 100 hours and find six other $10 million clients.”

The hourly model addresses another persistent challenge that AUM firms have had to deal with over the years. “We can work intergenerationally with a family with no feeling of accommodation or exception,” Berg explains. “If we work with the son of our ‘A’ client, we simply bill on an hourly basis, same as everybody else, and we have total flexibility to do so. Same when we get a call from a prospect, their balance sheet is irrelevant to whether it is a good fit for us. We don’t have those constraints at all.”

This, of course, allows the hourly firm to seek out clients among a larger pool of prospects, the so-called ”blue ocean.” “At the firm I used to work for,” says Berg, “we had a minimum. We looked for a certain demographic, a certain type of clientele, right in the bull’s eye. That creates a fairly small border, which is the high-income, high-net-worth delegator that most financial planners are seeking. There are hundreds of thousands of financial professionals who are seeking that type of client. Our target is the next level out from the bull’s eye, and there are hundreds, at most, who are targeting that audience.”

To sort through the various unanswered questions about time management, time tracking and the proper percentage of time to spend on non-billable activities, Jackson has created something called The Hourly Exchange, an online community of planners who exclusively follow the hourly revenue model. It’s still in its very early stages, but Jackson envisions a place where hourly planning firms can start to establish some benchmarks for the hours devoted to various activities.

“You’ll be able to ask questions of your peers, send emails to each other, explore best practices and, yes, the myths,” says Jackson. People who are struggling with the hourly model can connect with the authors of the book and other people who are facing the same challenges. "Someone will say: my first-year planner is at 30% billable hours. Is that high or low?” Jackson proposes. “Someone else will say, I tried to get to 40% in my first year. Second year is going to be 45%. Then 50% and it will max out at 60%; otherwise, we are not going to have time to do our continuing education.”

Fee leverage

The next set of objections that the book characterizes as myths are at the core of why most advisors gravitated to AUM rather than an hourly model in the first place. The first (I’m paraphrasing here) is that with hourly, the professional is being paid based on time, rather than on value. In other words, it is possible to give a quick answer to a question based on 20 years of experience, and the value of that quick answer might be in the tens of thousands of dollars. Shouldn’t a professional charge based on value, rather than time?

The close cousin to this objection is that there’s no leverage in hourly planning. The AUM revenue model lets a firm scale up compensation dramatically as clients get wealthier. The hourly firm charges an hourly fee, period.

The book presents a simple answer for these objections: Some of the most profitable organizations on the planet (legal and accounting firms, primarily) bill their clients hourly. The AUM model has stunted the profession’s ability to learn what those professions learned long ago about the most straightforward way to acquire leverage: As your advice becomes more valuable, you charge more per hour for it – and that not only becomes your leverage, but also how you account for the value you’re providing.

Admittedly, it’s hard to know how much to charge at first. Berg himself started out at $150 an hour and noticed that his ”close rate” fluctuated tightly between 95% and 100%. So he cautiously raised his hourly rates to $180, then $195, then (gulp!) $220. “I was fearful when we crossed into the $200s,” says Berg. “But there was no attrition, and our close rate never declined. We found that our close rate inched up that year when we crossed that big $200 threshold.”

The close rate offers a clue as to whether the planner is charging too much or too little per hour, but it isn’t perfect. Timothy Financial’s less-experienced advisors now bill out their time at $300 an hour, and Berg’s personal hourly rate is $600 – and the close rate still hasn’t budged. “I am continually surprised that there is no pushback,” he says. “I raised my hourly rate to create some distance from my colleagues, and reduce demand, but I’ve actually seen the opposite. We’re seeing higher-complexity people calling us, and the hourly rate is a complete non-issue for them.”

Meanwhile, contrary to the advice he gives others, Berg has persistently been unable to get this own billable percentage down below 80% of his time in the office.

Starting with hourly

Despite his cautious experience in his early years, Berg says that advisors just getting into the profession may find that hourly is the fastest route to profitability. He says that the business plan should start with some simple assumptions.

“We can assume that you aren’t going to maximize your billable hours right from the start,” he says. “After the first year, when the firm gets going, it might fall somewhere in the 900-1,000-hour range, and if the advisor is uber-efficient, it might reach 1,200 hours the following year. I don’t expect anybody being able to move above that,” Berg adds, “without sacrificing some type of life harmony.”

The new advisor simply has to set a fee that would allow him or her to survive in the first year and thrive thereafter. This is where many hourly firms fail: How do you set that price? Most newer advisors will give up all leverage by lowering their hourly fee to the point where, no matter how hard they work, they’re going to be unprofitable.

“I was talking with a young advisor about a month ago,” says Berg, “and she said, I can’t see how any hourly advisor would ever charge $250 an hour.” From there, the conversation became Socratic.

Berg: “Have you ever worked with a lawyer?”

Young advisor: “Yes.”

Berg: “Have you ever worked with a law firm associate?”

Young advisor: “Yes.”

Berg: “What are they charging?”

Young advisor: “$315 or $325, something like that.”

Berg: “How would you compare the value of that associate at a law firm relative to a financial planner?”

Young advisor: “Oh, a financial advisor is far more valuable.”

“She eventually,” says Berg, “said: oh, yes, I think I see where you’re going with this.” Berg advised another young planner to avoid the mispricing mistake, and model what he would need to charge to have a decent margin. The young planner started out any $450 an hour and managed to fill out a third of his 2,000 available hours with client work in the first year. A year later, he was up to 50% utilization, generating $450,000 a year in gross income.

Jackson and Berg aren’t trying to convince everybody – or, indeed, anybody – in the profession to switch to an hourly revenue model. Their goal with the book is to create a community among the scattered handful of hourly planning firms, so these iconoclastic professionals can compare notes and avoid the mistakes that the myths create – myths that are a part of the universal belief system in the planning profession.

“Within the hourly community,” says Berg, “we’re trying to say: Don’t buy into those myths. They aren’t true. You can be a thriving, profitable, fulfilled advisor in the hourly model.”

I expect The Hourly Exchange members, at some point in the future, to develop and refine the prototype of the planning profession’s revenue model of the future. It is just a matter of time.

Bob Veres' Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog at: www.bobveres.com.

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