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Hiring a financial advisor to help you manage your life savings is a big decision that shouldn’t be taken lightly. Over the years, the financial advising industry has justifiably earned a poor reputation for the high fees and opaque compensation arrangements that often lead to outcomes not in the client’s best interest.

Generally speaking, a fee-only financial planner held to a fiduciary standard (someone required to provide advice in your best interest) is the best way to ensure you’re being provided guidance that will lead to your desired outcome.

Still, many fee-only advisors (and financial planners) charge solely based on assets-under-management (AUM). Even a 1% asset management fee can have a massive impact on the growth of your investments and, more importantly, your net worth.

A more fair and transparent compensation model to consider is a flat fee. With a flat fee (typically billed monthly or quarterly), you’ll always know how much you’re paying for the services you’re receiving. Luckily, flat fees have recently started to gain traction among advisers critical of asset-based pricing.

 

Here are five reasons to work with a flat fee financial planner:

 

1) Allows you to receive on-demand personalized advice in your best interest

The primary benefit of the traditional AUM fee model is that it allows for on-demand personalized advice. The long-term benefits of financial planning come from the accountability and personalized advice that require an ongoing relationship.

With a flat fee, you’ll still be able to maintain an ongoing relationship to ensure you receive the advice you need as your financial life evolves. Don’t wait until you need advice to establish a relationship with an objective third-party professional you can trust to help you make critical decisions.

 

2) Provides less drag on the growth of your investments

If you decide you’d like to delegate asset management to your financial planner, a flat fee model means less drag on the growth of your investments. As your investments grow, the fee will remain the same. Meaning, that you give your portfolio a greater chance to compound growth over the years of disciplined investing!

 

3) Removes conflicts of interest created by the AUM model

The AUM model has several inherent conflicts of interest built into the compensation arrangement. An advisor who is solely compensated on assets-under-management could be less likely to recommend paying down debt over investing, even if that would create a superior outcome.

Additional strategies like Backdoor Roth IRA contributions can be impacted by rolling over 401(k)s. An AUM advisor may be incentivized to roll over a 401(k) when the better option would be to leave the assets in the 401(k), so you’re not subject to the pro-rata rule when converting money to your Roth IRA.

These are just a few examples of the conflicts of interest created by the AUM model.

 

4) Allows for an “advice-only” relationship for more DIY inclined clients

If you’re someone who is more DIY inclined when it comes to asset management, a flat fee arrangement allows you to still receive advice in your best interest without giving up discretion over the management of your portfolio.

However, if you’re not looking for an ongoing relationship, you may be better served by an hourly advisor.

 

5) Allows for younger people to get financial planning advice before they have “assets to manage”

One of the largest disadvantages of the AUM fee model is that it doesn’t allow a large portion of the population who doesn’t yet have assets to manage to receive advice in their best interest. Young people in particular who are high earners but have yet to accumulate an investment portfolio can benefit significantly by receiving advice on maximizing their income and building crucial habits.

A flat fee model means you’ll be able to start financial planning at a younger age which can have massive ripple effects on your long-term financial success.

 

 

While no fee model is perfect or can remove all conflicts of interest, a flat fee model is one of the most transparent ways to receive financial advice.

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