Rusty Redlow has always independently managed his personal investment portfolio. After a 25-year career as a chemical engineer with a large chemical company, Rusty retired and on January 1, 2018, opened an investment advisory business incorporated as R&R Financial Planning LLC. Rusty was eager to share his knowledge and investing experience with people in similar positions to himself; that is, those who have recently retired. Also, Rusty has discovered there is an unmet need for financial-planning advice for people living in rural areas. Through his parents, Rusty has learned that there are many seniors who cannot, or prefer not to, drive to larger cities for financial-planning help. Therefore, unlike other financial-planning firms, Rusty drives to his sometimes-remote rural clients who can be many kilometres from his home.

The first year of operations of Rusty’s company was well liked by clients, and he quickly built his client list to 35 (which is the maximum he plans to serve). However, despite success in attracting clients, his firm is losing several thousands of dollars each year. Prior to offering his services, Rusty had investigated client fee structures of several other firms. He discovered that some firms charge clients based on a percentage of the dollar amount invested by the client, some combine a fixed annual fee with a smaller percent of client investment amounts, and others charge an hourly fee only. Rusty wanted to keep it simple for his clients and decided to charge only a fixed monthly fee for each client in the first two years. However, because of an operating loss again in 2020, Rusty is looking for help form you to analyze his financial results and is seeking advice on how structure (i.e. fixed versus variable) client fees in 2021.

Over the past few years of operations he has found that some clients require very little time, while others call frequently and demand regular visits and monthly hard copies of statements. (Many older clients do not have Internet or email access and prefer face-to-face meetings.) Therefore, Rusty is considering a fee structure not currently being used in the industry; specifically, he would like to charge an annual fixed fee combined with a variable portion based on time spent by him and his assistant on each client account (information he has been carefully tracking). He believes this would better reflect the costs incurred to service his 35 clients.

Because most clients are in rural areas, on average, more than 90% of Randy’s time is spent driving to and from the client. The firm employs an assistant to help with administrative responsibilities, and this person works 20 hours per week out of Rusty’s home office. Rusty also contracted with another local person to help once a month with the preparation and mailing of a monthly investment news and portfolio update. The following is the operating results of R&R Financial Planning for the past full year of 2020.

Cost categories:	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
Financial planner salary (Rusty Redlow)	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100	$5,100
Assistant salary (extra quarter-end help)	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250	1,250
Internet subscription	140	140	140	140	140	140	140	140	140	140	140	140
Bloomberg monthly data feed	115	115	115	115	115	115	115	115	115	115	115	115
Depreciation (office equipment)	75	75	75	75	75	75	75	75	75	75	75	75
Depreciation (car)	385	385	385	385	385	385	385	385	385	385	385	385
Car - road side assist., Mtce and Gas	387	240	232	265	215	70	75	152	196	270	211	211
Supplies	676	530	525	579	540	462	499	525	525	567	525	504
Insurance	98	98	98	98	98	98	98	98	98	98	98	98
Portfolio information and mailing	38	30	15	23	19	8	14	13	15	30	13	16
Utilities	152	126	116	131	118	97	109	117	125	138	116	122
Total	$8,416	$8,089	$8,051	$8,161	$8,055	$7,800	$7,860	$7,970	$8,024	$8,168	$8,028	$8,016
Hours with clients (includes driving time)	239	151	145	152	111	20	21	56	87	154	107	112

Required:

1. Determine the independent variable and use the 2020 data above to determine which costs are variable (V), mixed (M), or fixed (F).

2. Use the high–low method to separate fixed costs per month and the variable costs.

3. Recommend to Rusty a fee structure for the rest of the year (2021), assuming his goal is to cover his total costs (including Rusty’s annual salary). The fee should include a fixed cost per client based on the stated maximum of 35 clients and a variable portion.

4. If Rusty were to record odometer readings when visiting clients, could this data be used to improve the variable charge rate? Would this change the classification of any of the cost categories?

Answer rating: 100% (QA)

1 Cost categories Financial planner salary Rusty Redlow F Assistant salary extra quarterend ... View the full answer