If Costco and Hermes had a Baby

By John Robinson, Founder/Financial Planner (January 15, 2025)

Readers of my personal finance content know I am a big fan of the Acquired Podcast.   Insights I have gleaned from the program’s deep dives into the histories of some of the world’s greatest companies have made me a better financial planner and helped me better understand how to position Financial Planning Hawaii and Fee-Only Planning Hawaii for the future. 

The Costco and Hermes episodes are two of my favorites.  On the surface, Costco and Hermes seem like odd bedfellows.  Costco is the iconic retail store that pioneered the discount warehouse concept, while Hermes is a French luxury fashion scion and the creator of the “Birkin” bag.  However, as I learned from Acquired, both companies have humble beginnings and overcame existential competitive threats to develop enduring brands with almost immeasurably wide moats. This essay is devoted to sharing how the business principles of Costco and Hermez are shaping the present and future of FPH. 

The Hermes Artisan Model for Scaling

I almost did not listen to the Hermes episode because I had little inherent interest in learning about the intricacies of a luxury apparel and accessories maker best known for its women’s handbags. I only tuned in after reading so many rave reviews of the episode. The reviews were spot-on. The company has a fascinating history and has remained a family-run business for nearly 200 years! 

The most interesting and relevant part for me was how the company, which has always employed highly skilled craftsmen (primarily leatherworkers) to make each bag by hand, managed to achieve global scale.  While other luxury designers scaled by outsourcing manufacturing to low-cost overseas factories with assembly line efficiencies, Hermes has always kept its manufacturing processes in France and in-house and has resisted the temptation to sacrifice hand-made quality for mass production. 

The company’s namesake, Thierry Hermes, founded the company as a master saddlery maker for the French aristocracy and grew his business on the strength of a special stitch that could only be done by hand. He passed the business on to his son, Charles-Emile, who then passed it on to two of his sons at a time when automobiles were making the Hermes horse harness business obsolete.   

An adroit pivot from horse harnesses to automobile and other travel-related saddlery (i.e. bags) not only saved the company, it brought the company broader renown for the durability of its “saddle stitch.”  To cope with burgeoning demand, Hermes first scaled by hiring all of the displaced leatherworkers from the dying horse harness making industry. 

However, as demand for Hermes bag accessories grew and the global supply of master leatherworkers dwindled, Hermes partnered with the French government to create trade schools in depressed manufacturing towns to create an entirely new class of artisans to go through Hermes’ seven-year apprenticeship program and eventually graduate to a profitable and prestigious lifelong career making bags.  The same double saddlestitch that made Hermes products famously durable two centuries ago is still employed by its artisans today with nary a sewing machine or assembly line in sight. Each bag is made by hand by one person.

The Costco Pricing Model

Acquired’s 2023 Costco episode attributes the unrivaled success of the company’s business model to approximately 50 business principles that were developed and implemented by the company’s original founder, Sol Price. One of the many remarkable elements of the Sol Price story is that he openly shared all of his business concepts with would-be competitors.  When asked how much of Sol Price’s business wisdom he had incorporated into Walmart and Sam’s Club, Sam Walton responded, “All of it.”  Similarly, Home Depot founder Bernie Marcus does not hide the fact that Home Depot copied the Costco model.  Jeff Bezos has also disclosed that Costco’s business model was and is the inspiration for Amazon’s retail model.

The business principle that resonated most with me was Sol Price’s unwavering adherence to honest pricing.  While Costco is well known for using its scale as leverage to negotiate vendor wholesale prices to rock bottom levels, Costco’s policy was and is to never mark up its prices to its members by more than 14%, with 11% as its consistent store-wide average.  In contrast, other discount retailers, such as Walmart and Whole Foods,  routinely mark up prices by 25% or more.  It is not uncommon for traditional non-discount retailers to apply markups of 100%.  Consistent with his belief in being completely honest with customers, Sol also completely rejected using “loss-leaders” to draw people into Costco.  He felt that this was betraying consumer trust because they would know that any company offering deals on goods sold at below cost must be charging higher markups on other products. 

Similarly, when Sol Price’s protégé and longtime Costco CEO Jim Sinegal was once asked why Costoco did not markup prices more, his response was, “We could raise the price of a bottle of catsup by 3% to $1.03, and no one would know. Raising prices just 3 cents would add 50% to our pre-tax income.  Why not do it? It’s like heroin. You do it a little bit, and you want to do more. Raising prices is the easy way.”

Simply put, putting long-term relationship building above short-term profits is a great business model that few companies have the discipline to replicate. Costco customers are loyal because they always know they are getting great value for what they spend.

In 2001, Amazon stock was severely depressed, and founder and CEO Jeff Bezos was facing pressure from Wall Street to show real earnings.  Amazon was just about to launch a price increase initiative to show profitability when Bezos turned to fellow Seattle-area CEO Jim Sinegal for his input and advice.  Jim explained Costco's honest pricing philosophy when they met over coffee at a Seattle Starbucks 9inside a Barnes & Noble bookstore!).  Immediately after the meeting, Bezos informed Amazon’s Board that he was canceling the new pricing increases.  Bezos would later recount that he learned from Jim Sinegal that day that “…there are two types of companies in this world – companies that work hard to charge their customers more, and companies that work hard to charge their customers less. Amazon wants to be a company that works hard to charge its customers less.”

If Costco and Hermes Had a Baby, It Would be Financial Planning Hawaii

One of the unique elements of the financial services industry is that it is in a constant state of disruption. Over my 35+ years (and long before I arrived on the scene), the personal finance/wealth management/financial planning space has always been ultra-competitive, with business models and technology platforms constantly emerging or becoming obsolete.  The five-year failure rate of new financial advisors has always been and remains 70%-80%. 

“Adapt or perish” is the ubiquitous mantra among those individuals and businesses manage to survive, and it is indeed how I survived too. The comprehensive multi-generational financial planning advice business at Financial Planning Hawaii and Fee-Only Planning Hawaii today bears scant resemblance to my early days as an investment broker with A.G. Ewards & Sons in the 1990s, where I was trained to attract new clients by cold-calling with tax-free municipal bond offerings. 

Adopting many of the same trust-building pricing principles that Sol Price instilled at FedMart, PriceClub, and then Costco helped me survive and thrive. While I was relatively early in making the jump from commission-based sales advice to the asset-based fee-for-advice model, for most of the past two decades, the structure of my pricing model has been very different from most of my peers.  Specifically, the industry standard for asset-based fees has settled at 1-1.5% of assets under management (AUM).  I was one the first to adopt a progressive, tiered pricing structure that declines as the client household AUM rises and effectively caps out for client portfolios above $5 million. 

The logic behind the tiered model is that larger portfolio sizes are not proportionately more complicated or more time-consuming from a financial planning perspective, so it does not seem fair that the clients should pay more for planning advice just because they have more wealth. While many of our competitors focus on maximizing revenue per client, I follow the Costco model of capping profit margins per client and constantly looking for ways to save clients money.  Over the past 20 years, our asset-based fee percentages and overall asset-based payout ratio have only declined, and we have changed custodial platforms a couple of times to help our clients avoid nuisance fees such as annual account fees, inactivity fees, and ticket charges. 

Last Fall, I attended a symposium in which financial planners shared their business models and received constructive feedback from industry thought leaders.  The feedback I received was that I do not charge enough for the amount of work I do and that I am leaving money on the table.  Jim Sinagal’s Catsup pricing immediately came to mind. Like Costco,  we have a very successful business model that is the result of building client trust by providing great value for a great price.  We are not interested in being like everyone else.  Like Amazon and Costco, Financial Planning Hawaii wants to be a company that works hard to charge its customers less.

It is worth mentioning that the asset-based pricing model has come under fire in recent years. While it is still by far the dominant model in the financial planning and wealth management space, some financial planners have adopted a flat-fee pricing model instead. Consistent with the adapt or perish mindset, I established Fee-Only Planning Hawaii to offer consumers a choice of one-time flat fee financial planning advice or Financial Planning Hawaii’s flagship tiered asset-based pricing model for consumers who want ongoing comprehensive planning advice that includes portfolio management.

With respect to Hermes, a lightbulb turned on in my mind when the Acquired hosts Ben Gilbert and David Rosenthal described the company’s steadfast adherence to handcrafted manufacturing. A big challenge that successful financial advisors face is how to scale. As a practical matter, an advisor can effectively service a finite number of clients. This is especially a problem in my business because the way we do comprehensive financial planning is extremely labor-intensive and time-consuming. 

One method that other financial advisors apply to overcome scale limitations is to outsource investment management to turnkey asset-management platforms (TAMPS), which are portfolio management equivalents of outsourcing to a factory in China.  We would never consider this option because part of our value proposition is that each client portfolio we construct is unique.  In fact, ALL of the financial planning advice, including portfolio management, is personalized.

A second common means of achieving scale in the financial advice business is to hire other advisers and then either take a cut of their revenue or share expenses.  This strategy also will not work for me because it is difficult to gain brand credibility when every advisor has his/her own business ideas and philosophies.  I have built a financial planning model that stands apart from competitors and allows us to establish wonderful multigenerational client relationships. To keep this going, I want and need the guidance that is provided to each new client who comes to us to be consistent.

The only way for Financial Planning Hawaii to scale is to follow the Hermes model.  As support staff, Alicia, Sue, and Emily are all implementing the approach and philosophy that I have developed over the past 35 years.  For the business to continue beyond me, I need to train a new generation of financial planning "artisans" in-house.  In following in the footsteps of Thierry Hermes, our first new artisan will come from within my family.   My youngest son, Brody Robinson, plans to formally begin his apprenticeship upon graduating from Northeastern University two years from now (though he is informally building his knowledge base already).  Others of my four progeny may follow as well, but, if not, we will hire and train new apprentices just as Hermes has done.

ADDENDUM

Costco succinctly summarized its corporate ethos in a list of five principles that management commits to memory and are listed in order of importance and posted in every Costco store:

• Obey the law
• Take care of our members
• Take care of our employees
• Respect our suppliers

Reward shareholders—If we do these four things throughout our organization, we will achieve this ultimate goal. 

Financial Planning Hawaii’s somewhat less succinct list of guiding principles is as follows:

1. We provide comprehensive financial planning guidance that includes tax planning, estate planning, investment management, insurance risk management, social security planning, portfolio sustainability analysis, and more. We are a poor fit for people who are only seeking portfolio management.
2. We have a fiduciary relationship with our clients at all times.  Their interests must always come ahead of our own personal and financial interests.
3. The only product we sell is our financial planning expertise and experience.
4. Our value proposition is that we help our clients save and invest efficiently and raise awareness of rules and laws that may help them make or save money and/or avoid planning mistakes. 
5. We provide all clients with access to eMoney, a secure, online, cloud-based financial planning platform that enables them to centralize, organize, monitor, and maintain all aspects of their financial lives.
6. We are clear in disclosing how and how much we are paid. Copies of our fee agreement and other client documents are uploaded to all clients’ eMoney Vaults.
7. We strive to coordinate with our clients’ other trusted advisors, such as CPAs and attorneys, so that our clients receive the best possible advice.
8. We use our e-newsletter to share timely information and to educate and engage our clients over time.

Here is a list of our principles that are specifically related to portfolio management:

• Prospective clients should not hire us to try to outperform the stock market or get rich quickly.  Our portfolio management objectives are to help clients invest efficiently for their objectives and avoid making costly mistakes.
• Clients should understand that portfolio management is intrinsically linked to tax planning, estate planning, and insurance risk management.
• We adhere to academically supported principles of portfolio management and investing and strive to support our specific guidance with links to high-domain authority sources.
• Every client portfolio we construct is personalized.  We do not use Turnkey Asset Management Platforms (TAMPs) or third-party money managers.
• We eschew market timing and never make predictions about the future direction of the stock market or the magnitude of upturns or downturns.
• We are ardent proponents of index fund/ETF investing.  However, we use individual fixed-income securities instead of bond funds/ETFs. 
• We reject most common investment rules of thumb, including “the 4% rule”, “the “100 minus your age rule”, and the 60:40 “ideal” asset allocation as they are not supported by current empirical research.   
• We strive to keep portfolio management expenses as low as possible, and internal expense ratios are a consideration in all mutual funds, ETFs, money market funds, and 401(k) platforms we consider. 
• Cash management is an important element of portfolio management, and, as such, we strive to make sure that cash deposits in client accounts are allocated to money market funds or other interest-bearing, liquid instruments.
• While we do accept discretionary trading authorization, we want our clients to be actively engaged in all major investment decisions and we strive to educate our clients and inform them of relevant law changes and innovations that may arise over time.
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John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.