Mini Case 2 - Chapter 3

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, 2017, 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 this success, his firm lost several thousand dollars last 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 8a percent of the amount of client investment dollars under management, some combine a fixed annual fee with a smaller percent of client investment amounts, and others charge an hourly fee. Rusty wanted to keep it simple for his clients and decided to simply charge a fixed fee in the first two years. However, because of an operating loss so far in 2020 again, Rusty is looking for help to analyze his financial results and is seeking advice on how structure (i.e. fixed versus variable) the fees he charges to clients next year (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 on each client account (information he has been carefully tracking). He believes this would better reflect the cost to service the various 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 2019.

Cost categories: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Financial planner salary (Rusty Redlow) $4,600 $4,600 $4,600

$4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600 $4,600

Assistant salary (extra quarter-end help) 975 975 975 975 975 975 975 975 975 975 975 975

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 323 200 194 221 179 58 62 126 163 225 176 176

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 $7,577 $7,274 $7,238 $7,342 $7,244 $7,013 $7,072 $7,169 $7,216 $7,348 $7,218 $7,206

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 2019 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 next year, assuming his goal is to break even (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?