Today’s post is about accounting fees, something that seems to be a bit of an unknown quantity to many in the personal finance community and therefore something that may need a bit of light shed on it. A recent MMM post was about doing your own taxes and highlighted how much he pays his accountant, and I wouldn’t be surprised if many readers were perhaps a bit confused as to how even MMM’s accounting fees were calculated. Well, today I’ll give you an overview of how the typical system works, and also how things are changing for our industry as well.
The personal finance community is heavily focussed on the finances of individuals (hence the name personal finance), but for most people working in the accounting industry their revenue will come from clients that are in business, or from clients who have significant investments that can have more complex tax implications. While most firms will still have smaller individuals as clients, the fees from this segment of the market don’t contribute much to the average accounting firm’s revenue.
Given this reality, many readers of this blog may not be particularly familiar with how accountants charge, and if you even use an accountant, you might pay as little as $150 per year to get your tax return done. And even if you do pay such a small amount, you might still think that’s expensive!
Like most accountants I’m no stranger to fee complaints, and fees really are a contentious issue that can be very difficult for clients to understand, let alone accept. Because fees are such a contentious issue for clients (our surveying tells us to accept that clients will always complain about fees, because it’s their job to complain), a significant change is happening that has the potential to forever change the way that we do business.
In order to explain this issue, I probably need to explain the current system. Just try to control your outrage…
The typical way of charging accounting fees
Accountants love to measure things, and it should therefore come as no surprise that we don’t just apply this measurement to the financial performance of our clients, but to our own financial performance as well.
The most essential measurement tool for accountants is the timesheet system, and this is where people record the time spent on a client’s work. Each hour is typically broken down into 10 “units”, which are six minute blocks of time, and clients are therefore charged one unit for every six minutes that their job is being worked on.
Now the cost of each unit depends on the skills, experience, qualifications and seniority of the person completing the work, but hourly charge rates could vary from as low as $60 per hour for a first year cadet straight out of high school (with no accounting degree), right up to rates as high as $750-$1,000 in some of the biggest and most expensive firms.
If a person’s hourly rate is say $300, and they work for two hours on a client’s job, then $600 (being 2 x $300) goes on the WIP (or Work in Progress) for that client. At the end of the job, you look at how much time is on the WIP, and this is essentially the fee that you charge the client. Your fee isn’t always the same of course, because sometimes you might have taken too long to get the job done, and may have to write some of the time off, and at other times you may have done it quicker than you expected and may be able to charge the client more.
As well as this system of charging, staff also have budgets that they need to meet, which essentially means that they must charge out so many hours per day/week if they want to meet their KPIs and get that next promotion.
All of this means that a lot of accountants end up with quite conflicted priorities when it comes to servicing clients. Often you might know that a client needs assistance, but that they can’t really pay for it, so you won’t devote as much time to them since they won’t be able to pay for your services which will result in a write off. This means that they get a sub-standard service as a result. Other clients may have a much greater capacity to pay, and you might therefore be likely to charge them for every unit of time you spend on their work (and then some) because you know that you’ll recover it all. These clients get a good service, but they may not feel like it’s good value since they are paying a lot for it.
Because this is the system that most accountants use there is often a reluctance to quote a fee up front. If the job takes longer but you have a fee quote then you are more likely to end up in a write off position. This means that many accountants avoid giving a fee quote unless they are absolutely pressured into it. I’m sure this sounds completely bizarre to anyone from outside the industry, as there aren’t many other professions where you can get away with not telling someone how much a service will actually cost in advance. I know in my own life that I don’t do anything (e.g. get my car repaired, see a solicitor, etc.) without knowing how much it will cost first, but our industry doesn’t necessarily do the same for our clients! Not very hypocritical at all…
Now unless you have your clients trained up about what to expect, there’s a real risk that they will become incredibly frustrated with this system of fees, which is part of the reason that there is such a change occurring within the industry now.
The solution to client complaints is rather simple, but it has been a long time coming to the accounting industry. While we call it “fixed fees”, others might equate it to getting a quote, but it’s really just about agreeing the price up front. It’s a pretty easy concept to understand, but it has been resisted for the simple reason that it limits the amount that accountants charge. Like most things in life, if you get a quote up front, chances are you will pay less for the product. I think the person giving the quote becomes more worried that you will compare to someone else while they still have the option of going elsewhere, so they have to put in a more competitive price even if you aren’t seeking a second opinion!
The other thing that typically goes with fixed fees is that for any additional services (e.g. we had to calculate the capital gains tax on all of the shares that you sold this year, which you don’t normally do), we are supposed to agree the price with you up front, before we complete the work. This essentially means that we need to discuss the fee with you first, rather than just sending you the bill after the fact and hoping that we don’t get a phone call from you complaining about it.
For our firm, we have historically had the approach of just deciding ourselves what services are good for clients, providing those services and then hitting the client up with a bill after the fact. This approach has seen fee growth in our firm go through the roof over the last 15 years, but due to things like cloud accounting and a greater level of cost consciousness from our clients, there is a whole lot of pressure on fees. This is now having the effect of slowing down fee growth, or in some cases causing fee contraction, and fixed fees will just heap more pressure on in this area.
Monthly payments – a great way to pay for anything if you can’t afford to pay pay all at once!
Many of us in the personal finance community would scoff at the cliched way of buying a car on credit: No deposit, low monthly payments, or maybe even you can put it on interest free finance! It’s the most cliched way of selling a product that someone can’t afford.
As ridiculous as it may seem, the concept of monthly payments is already here for the accounting industry, and goes hand in hand with fixed fees. If the client has agreed to pay you $1,200 for the year, then they can just pay you $100 per month by direct debit and it’s all taken care of! It may seem ridiculous that a financial advisor (like an accountant) is recommending that people pay things by the month rather than budget so that they can pay them at once, but unfortunately it’s easier this way. And many accountants are as interested in making money themselves as they are in assisting their clients to make money.
So where are accounting fees headed?
Even though the accountants’ motivation in this area isn’t necessarily entirely selfless, that doesn’t mean that fixed fees and monthly payments aren’t good things for clients. In fact, I predict that they will result in a stagnation or even decline of accounting fees for some time. Part of this is because clients won’t agree to higher fees up front, but also because most people simply won’t pay for a service if they know that they’re going to be charged for it. If we need to check with a client every time we do something for them, you can guarantee that they’ll tell us not to provide the service a lot of the time, and a lot of accountants won’t want to have that discussion with the clients so they may just throw the service in for free.
And all of that is ignoring the other big issue, which is that in many bigger firms accounting fees have grown way beyond fair value, and even without fixed fees and monthly payments they need to contract just to get back to a sustainable level that is even close to the rest of the market (e.g. medium-sized and smaller firms). Some people believe that this will cause a “race to the bottom” as far as accounting fees go, but even if that’s only 10% true, it can only be a good thing for anyone that needs an accountant!
Share your experience with accounting fees
Have you ever been confused about how accountants charged fees? Are you less confused now? Or more ourtraged than before? Either way, let me know!