This article builds on a previous critique of ongoing advice fees.
As of this writing, only three known financial planning firms in Australia operate on an hourly fee basis. This is surprising, given how common the model is in other professional services like law and accounting. There is also a mature hourly advice industry in other countries, particularly the USA.
This article has been written to explain this rarely discussed model in an Australian context.
How It Works
As opposed to the typical advice model of charging what is effectively an asset-based subscription fee in order to offer services, an hourly model is much simpler. When work is completed for a client, they are billed directly for the time it took to complete that particular service. It really is as intuitive as it sounds.
For the adviser, this structure requires tracking time, a practice uncommon in traditional financial planning but routine in law and accounting. While some advisers dismiss time-tracking as tedious or impractical, it has long been a standard in other professions.
Beyond pricing, the services offered by an hourly adviser don’t necessarily differ from those of a conventional adviser. In fact, they may be enhanced by the flexibility and objectivity that come with this model.
One key difference is investment management. This firm, except in very rare cases, does not take direct control of client funds. In the financial advice industry, this is highly unusual, as direct portfolio management is often used to justify asset-based fees. Instead, an hourly firm focuses on strategic recommendations, guiding clients toward products they can access themselves, such as ETFs and industry super funds.
Initial Engagement
ID Advice, like many other hourly firms, takes a slightly different approach to initial client engagements. To increase practicality whilst maintaining transparency, the first piece of work is charged at a fixed cost. Since new clients are unfamiliar with the process, expecting them to commit to an open-ended hourly arrangement from the outset would be unreasonable.
Following the initial meeting, the client receives an estimate of the hours required to complete the service. As long as the scope remains unchanged, the cost stays the same, providing a smooth transition into the hourly model.
From there, all future meetings and services for existing clients are billed purely on an hourly basis.
Advantages of Hourly Advice
The following points highlight the key advantages of an hourly-based advice model compared to the conventional approach.
Tailored Fees
Every client’s financial situation is unique, and an hourly-based adviser naturally adjusts fees to reflect this.
A more complex financial situation results in a higher fee, while a simpler engagement costs less because less time is required. Clients who prefer additional meetings or ongoing discussions will see this reflected in their final cost, whereas those requiring only minimal guidance or a more consultative approach will pay significantly less.
This stands in contrast to the conventional approach, where firms often rely on fixed service packages for initial advice. While convenient, these packages are often too rigid to accommodate the endless variations in clients’ needs and circumstances.
Greater Perceived Independence
As hourly firms typically do not manage investments directly, clients may feel a stronger sense that the advice provided is truly in their best interest.
Under a funds-under-management (FUM) model, an adviser’s income increases as a client invests more. This creates an inherent incentive to prioritise investment recommendations that channel more funds into managed portfolios, such as favouring additional superannuation contributions over alternative strategies like direct property.
Whether this incentive actually influences an adviser’s recommendations depends on the individual person. However, even if an adviser operates with integrity, simply knowing this incentive structure exists may cause a client to question the objectivity of the advice.
This scepticism is a key reason why many financially informed individuals avoid traditional financial advice. They may feel advisers have a vested interest in selling them a particular product, even if it isn’t necessary for their situation. For instance, an investor who already follows passive investing principles and holds ETFs may have little interest in advice that primarily recommends switching super or investments into actively managed options. As a result, they may overlook the broader strategic benefits of financial advice simply because product recommendations are so intertwined with the process.
Consistency and Transparency
An hourly model provides clients with a clear breakdown of time spent on each aspect of their advice, offering a level of transparency that is impossible under a conventional FUM-based structure.
With asset-based fees, there is no direct link between the cost of advice and the time spent delivering it. Clients may pay significantly different amounts for the same level of service simply because their asset balance differs.
By contrast, an hourly model ensures that clients understand both the effort required and what to expect for future engagements. For example, if superannuation advice took four hours in a previous engagement, a client can reasonably anticipate a similar timeframe, and cost, should they need similar advice again.
Lower Insurance Costs
Since hourly advisers do not accept insurance commissions, clients can typically secure premiums that are around 30% lower than those arranged through advisers who accept commissions.
This has been explored in greater detail in a previous article.
Access to a Broader Range of Clients
The traditional FUM model naturally excludes certain types of clients, particularly younger individuals who haven’t yet accumulated significant wealth.
Hourly advisers are not constrained by asset levels and can assist clients regardless of how much they have to invest. This is especially beneficial for those with illiquid wealth, such as small business owners or individuals who prefer property investments over shares and managed funds.
Reduced Regulatory Burden
Over-regulation is a common industry complaint, and while some of it may be justified, certain challenges are arguably self-inflicted.
For example, many advisers struggle with the increasing restrictions around deducting fees directly from clients’ superannuation. Given the critical role of super in retirement planning, tight controls in this area are arguably warranted.
Hourly firms, however, are largely unaffected by these restrictions. Without reliance on super-based fee deductions, they avoid this regulatory hurdle entirely. This also future proofs the business against potential legislative changes that could further limit or even prohibit adviser fees from being paid out of super.
Summary
This article aims to provide insight into how an hourly financial advice firm operates and the potential advantages it offers compared to the conventional model.
As discussed in a previous article, dissatisfaction with the standard funds-under-management (FUM) fee structure is growing. Yet, despite this sentiment, only a handful of firms have opted for an alternative approach. This leaves a clear gap in the market, one that an hourly advice firm should be well positioned to address.
With investing becoming increasingly accessible, the demand for advice that prioritises strategic decision making over product recommendations is likely to rise.
Criticism of the hourly model from conventional advisers is common, but notably, these critiques tend to focus on its viability as a business model rather than whether it delivers better outcomes for clients.
