July 16, 2012

Ideal Revenue Stream For Financial Planners Which Suits Clients As Well!

Sadique Neelgund

The financial planning profession is so exciting that I have found people jump into it without thinking twice. The perception of importance and respect associated with a financial planner vis-à-vis an agent selling financial products is so much that it is very easy to transform oneself mentally into this new avatar, in many cases, without properly internalizing the income potential additional responsibilities that naturally come to a financial planner.

Hypothetical Commission Loss Syndrome

A new born financial planner, in all sincerity and innocence thinks, ‘I don’t want to sound like an agent, trying to shove some products down the throat of a client. I want to be more dignified and think from the client’s perspective, and don’t mind losing some commissions in the bargain.’ A couple of clients later, he starts feeling underpaid, because his benchmark of comparison is still that of an agent who made a killing selling a few insurance policies!

More work and less pay!! More time invested with the client and less pay!!! More knowledge and less pay!!!! God, ignorance was truly bliss… This is what I call as ‘Hypothetical Commission Loss Syndrome”.

This is experienced by many new financial planners, who operate on commissions as their revenue stream. The solution to this issue lies in the shifting of one’s core value from making quick money to setting up a proper financial planning practice. A commission earned through selling a financial product is by far the most uncomplicated way of earning revenue for a financial planner. There is easier acceptance from the client, a healthier, more frequent and sustainable cash flow (through renewal and trail commissions) and most importantly, one satisfied client leading to another through authentic referrals.

What is the Way Out?

Having said that, let us consider the flip side too. One of the main drawbacks in this system is the fact that you do not get paid upfront for your planning services. Your income lies in the client following through on your advice by actually investing in the suggested products, and that too through YOUR code or license! This amounts to expecting a high level of loyalty from the clients, which unfortunately is non- existent at least in your initial days as a financial planner. Also there is a risk of not getting adequately remunerated for your effort, since the commission rates are not directly proportional to your time investment. This again, may prompt you to suggest some solutions which attract more commissions to yourself, which may indirectly put the client to disadvantage, thereby defeating the very purpose of financial planning.

A way out to avoid such occurrences is to charge a nominal fee for your financial planning service. This way, your interests are kept right from the very beginning and you become immunized from the commissions derived from the suggested products, thereby enabling you to give unbiased solutions. Also, it can be easily validated that advisory professions such as teaching, accounting, medical practice etc. have been remunerated from time immemorial through a fee based model. What makes us financial planners any different? We are playing an advisory role to our clients and deserve to get compensated for our time through a nominal fee. The question here is ‘what could be a nominal fee?’

Fees for Initial Financial Plan Preparation

This can be worked out using a 4 step process.

Step 1– Identify your monthly income requirement. (Say Rs.50000/-)

Step 2– Figure out how many quality hours you can give per day and the number of working days per month. (Say 5 hours per day and 20 days a month giving a total of 100 productive hours per month

Step 3– Divide the monthly income in step 1 by the total number of productive hours in step 2. (In the case given above, it is 50000/100 = Rs. 500/- per hour)

Step 4– Multiply the hourly rate in step 3 by the average number of hours required for the complete preparation of a financial plan (For example, if right from establishing the relationship to identifying the financial objectives and thereby analyzing the cash flows and preparing the financial plan requires an average of about 15 hours, the initial planning fee could be 15*500 =Rs.7500/-).

The flip side in doing a fee based financial plan is that the prospective clients are not used to this kind of an arrangement, especially in India. People somehow think they are smarter than what they are, when it comes to financial matters. The only way to overcome the same, is through patient explanation of how paying a fee would enable the planner to give them an unbiased and efficient financial solution. Any new idea requires some effort to be put in order to become popular.

Some planners follow a combination approach, where their remuneration is evenly distributed between the fee charged and the commissions earned through the products. Though it looks like a nice idea incorporating the good things from both the methods, let us not forget that this also carries the flip sides of both!

Fee for Monitoring and Review of Financial Plan

So far we have discussed the various possible streams of revenue for a financial planner, where the planner gets paid for his efforts in reaching the implementation stage of the financial plan. However let me remind you that the biggest responsibility of a financial planner is yet to come; ’Periodic asset monitoring and review’!!

An initial financial plan invariably contains a lot of assumptions such as inflation, growth in income, size of the financial objective, the expected return, the risk profile of the client etc; the list may be very very long! This makes the periodic monitoring and review of the plan, the most critical aspect of the financial planning process. This in turn presents the financial planner the opportunity of creating a source of recurring revenue stream, the monitoring and review fee. This may be charged either as a flat fee or as a percentage of the total assets monitored. The planner may also decide to do the same in return for the commissions earned by him through the investments.

Ideal Fees for Complete Process

Now that we have discussed in detail, the different possible revenue streams of a financial planner, through all the stages of the financial planning process, it is time for us to attempt to arrive at an ideal combination of these methods, which would create a mutually productive situation for the two protagonists, the client and the planner. For this, let us first summarize the various parameters that are required to be considered.

  1. The time invested by the planner
  2. The absence of bias in the planner’s mind while recommending solutions
  3. The loyalty of the client and
  4. The commission rates in the prescribed solution

Now, let us list down the various phases in which the planner adds value, for which he deserves remuneration.

Phase 1– Preparation and Implementation of the Initial plan

Phase 2– Periodic asset monitoring and review

It is evident from the above discussion that for being fair to the planner and to ensure that the client gets an unbiased solution, a fee based model would be ideal for phase 1. Some planners try to optimize the fee in this phase by offering to offset the same with the commissions earned through investments; however this offer would only confuse the client as he would not be in a position to attribute a specific value to the planner’s effort.

By the time phase 1 is over, almost all the parameters listed above are taken care of. The time invested by the planner has been remunerated by the fee, which almost definitely eliminates the possibility of bias in the planner’s mind. The client’s loyalty is clearly known in terms of whether he has followed through with the recommendations made, and also by whether he has made the investments through the planner or not. If yes, the commissions earned through the solutions given is also known exactly.

This gives us some room for flexibility in phase 2, where the asset monitoring and review fee could very well be offset by the commissions earned, without causing any confusion to the client and also by being absolutely transparent with him.

For example, if the asset monitoring and review fee at the end of one year happens to be Rs.10,000/- and you have already earned a commission of Rs.6000/- through the investments made by the client in phase1, you may bill the client only Rs. 4000/- as the review fee.

This way we can ensure fairness to both the parties in this professional engagement and there by create a long lasting, WIN-WIN relationship between them.


Authored by,

Chenthil Iyer

Chief Strategist Personal Finance
Horus Financial Consultants Pvt. Ltd

23 Thoughts to “Ideal Revenue Stream For Financial Planners Which Suits Clients As Well!”

  1. Interesting views Mr chenthil. This is my fifth year into financial planning practice and this is what I found working. I decide on a per client revenue per annum say Rs 20,000. This I communicate to the client upfront. My planning and review fee is arrived at after adjusting for the placement income.However I do charge a minimum retainer fee of Rs 5,000 per annum (irrespective of my placement income from the client). This way I ensure transparency with my client and he is fully aware as to "What is in it to me". My average fee income is Rs 7,500 per client per annum.

  2. venkytuty says:

    Are there tools in the marketplace which helps to track all client investments and commissions earned on them on a granular client level? Why I am asking this, this process of identifying which investments were made through the FP and which are not, it becomes a time consuming and tedious exercise.  On top of it, there is a possibility of under-invoicing the clients if you calculating it correctly.  So a consolidated tracking tool would help.  Looking to hear from the full-time planners.

    • It sure is quite difficult to measure every penny earned from your client, especially when you have many to cater to. But I guess if you put a process in place, it can be easily tracked even using a simple excel sheet.

      Sadique, are you listening? You make so many tools for comprehensive financial planning. Probably you can make one to track the commissions too.. Of course that would involve some manual effort, but I personally dont believe in investing money for a software tool just to track the commission income. Dont know if such a tool exists as well. Anyone else who could throw some light into this?

  3. jayaramanpillai says:

    Hi Chentil,


    This is truly a great article for evolving financial planners..


    why i would mention as " evolving" is that most of us are in the evolving stages where we are still looking for sustainable and long term strategies which can help us penetrate and retain clientele.. 


    if you can follow up with some tools to help the first time financial planners- software updates, excel sheets etc- which can help us get started.. it would be nice.. also there are many of my friends who have migrated from financial services industry to financial planning- not necessarily through CFP.. but still want to follow this profession.. how can they built competence in this domain??


    i know some of these are time consuming issues .. but if they can be addressed here.. it would be of great help to many aspirants..


    once again.. thank you for a wonderful article.. and best wishes for the year ahead..



    • Thanks for the compliment. The word 'Evolving" is very appropriate. Its time that we dropped the word "Nascent" and moved on in life 🙂

      The CFP curriculum does add value, however from setting up of practice point of view, not much of guidelines are available. The conceptual clarity is also not provided by most education providers as most of the candidates are just wanting to pass the exam, leave alone developing  the mindset required to set up one's own practice.

      This is precisely the reason why my organisation Horus Financial Consultants Pvt. Ltd focusses on recruiting associates who wish to set up their own practice and provide them with a support system that offers continuous coaching and development. We've also developed a unique software tool to replicate our philosophy of comprehensive financial planning. You may view the demo of the same on http://www.horusfinancials.com/knowledgehouse.html

      I'm sure there are enough other practising CFPs out there who would be willing to  help newcomers with setting up their practice. Sadique is also leading the way with his excel based planning solutions. 

      But at the end of the day what you need is a strong philosophy and process to succeed as a financial planner. The tools will find ther way into your life 🙂

  4. Sukhvinder Sidhu says:

    Thanks Chenthil for such a good guidance to evolving financial planners!

    The flow in the article of moving from the "Commission Loss Syndrome" to an Optimum and Ideal Revenue stream for financial planners is appreciable. You have clearly dwelled upon what is the practical solution for the revenue problems faced by most advisors taking to financial planning profession to a lesser or greater extent.

    But don't you think there is a also place for a model charging only flat fee without earning any commission at all? Although the toughest task requiring great patience and perseverence, but it is most justifying to the FP profession being without any conflict of interest at all and working only for the client and not for any company.

  5. Hi Sukhvinder,


    This is an interesting question. And the answer to this lies in the question itself. If you are NOT implementing the solutions thru you and NOT receiving any commissions,  you need not offset the same against the review fee. However, if the client trusts you with implementation, I'm not saying offset it against the current year's fee, but against the next year's review fee. This way you can lock in the clients with you for a longer period. So it becomes a win win situation. In a pure fee based model , if the implementation happens thru some one else, there are two problems. One, the client has to shell out the commissions to the other agent as well as your fees in full, so no cross subsidisation. Second, there is a possibility of the client being sold the wrong product inspite of your recommendations! Hope this clarifies. 

  6. Sounds to be an interesting model. However care needs to be taken to ensure that the client derives appropriate value from your engagement. You should also be constantly aware of the perception he/she is carrying regarding your process. That means you have to continuously educate your clients regarding the logic behind your process at each step of the engagement. Once this is done effectively, the retention is ensured. Your practice is never valued by how many clients you enroll in a year but by how many of them retain you at the end of every year!

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