20 – Time based fees: what are they?
As the name suggests, a time based fee is one where the fee charged to the client is calculated according to how much time the adviser spends on the client’s file.
The simplest way to calculate time based fees is to use an hourly charge out rate. For example, a financial adviser may price herself at $300 per hour plus GST. The amount charged to the client is calculated by simply multiplying this hourly rate by the number of hours worked on the client’s behalf. 10 hours work generates a fee of $3000 plus GST.
Variations can be used, but they are more to do with style than substance. Some professional firms, such as legal practices or accounting practices, divide their hourly rates by 10 and then charge clients in 6 minute instalments.
Clients typically hate it.
Financial advisers tend not to be so pernickety (or, as some might call it, so obviously penny-pinching). By far the most common way of charging a time based fee is to use a simple hourly rate and to charge for each hour (or part thereof) spent on the client’s file.
Staff at different levels of seniority often have different ‘charge-out’ rates. The idea is that the rate paid by the client reflects the amount of training and expertise required to complete a particular function. It also reflects the remuneration paid to the staff member. Lower charge out rates for relatively cheap staff can be just as – and often more- profitable for businesses than the higher charge out rate applied to more senior staff.
As a side note: this can be an important thing for practice principals to keep in mind. Let’s say the principal charges $300 per hour. They have a paraplanner who costs $50 per hour and who is charged out at $150 per hour. At first glance it might seem that it is better for the practice principal to do the work themselves and charge $300. But this is very short term thinking. Much better for the practice to have the work done by the more junior member of staff, and still make $100 per hour, while the principal goes in search of work that only he or she can do, and which must therefore be charged at $300 per hour. The basic idea is: don’t compete with your own staff. Make them busy first. Income generated by someone else is the best income there is.