Benefits of a Flat Fee Financial Advisor - Part 1

Today I want to talk about fees. It’s a huge issue within my world. More importantly, it’s an even bigger issue in the lives of clients.  Fees can take the form of sales commissions, a percentage of the assets the advisor manages, hourly fees, and more. I know it is confusing and is why I operate under a single, flat fee structure.

That’s right, I charge one flat fee for financial planning and investment. It is $8,400 a year. The fee is based on my knowledge and experience. I do not charge based on sales products nor do I charge on things outside of my control, like what the stock market does. Also, it is one fee, not a choice of six different flat fees. Or my favorite combination, advisors who say they charge a flat fee for a financial plan and then charge fees for the investments they manage. But I digress.

Here’s what I have learned over my years in this confusing world that is the financial services industry. It typically takes the same amount of time to do financial planning right for someone with $3 million as it does for someone with $9 million. So, if it takes the same amount of time, why should someone potentially pay three times as much just because they have a larger asset based? I don’t know for certain, but I’m guessing if your physician charged you more for the exact same procedure as someone who makes less you would be upset. If that’s the case, why is it acceptable in my world?

Let’s talk examples, because I think this is where you will start to see what I am talking about. My average client has roughly $3 million in assets. The current average fee for Assets Under Management (AUM) advisors is to charge a .88% fee. This is based on a national study released in 2021. This means for those AUM advisors who manage a $3 million portfolio, clients are paying $26,400 a year.  Typically, this is just for investment management services. You know, charge a fee based on what the stock market is doing, which no one controls and is one of the biggest fallacies in my world. But let me be clear – this .88% fee does NOT include the internal investment fees. No, this nearly 1% annual fee is just what you are paying the AUM advisor. There is one more big fee for investments that I will talk about in next week.  Back on topic, for my clients who think there may be a slightly better option, they are paying a flat fee of $8,400 a year. Right off the bat, clients working with the old school AUM models are paying more than three times my annual fee. And it only gets worse from there.

We have all heard the story attributed to Albert Einstein that the most powerful force in the universe is compound interest. Well, I am pretty sure the story isn’t true, but what does happen when you compare how a $3 million portfolio does under these two fee scenarios?

I need to give you some background here. The basic assumption is predicated on what a 60/40 portfolio has averaged annually over the last 20 years. Coincidentally, it has averaged 6.4% a year.  You can’t make this stuff up. Regardless, it’s also based on the fees you pay to the advisor staying the same. I want to keep this a simple example.

First, let’s look at how much one pays for fees under the two scenarios. For the $8,400 fee model, a client will pay $168,000 over that 20-year period. Again, this is for financial planning and investment management. In the case of the more common AUM advisor, clients will have paid over five times that amount at just under $917,000. This is not a typo. Yes, my average client could pay up to five times as much with a traditional AUM advisor who is charging industry average fees!

As a reminder, these sorts of advisors typically do just investment management. You know, meet with you once or twice a year in their fancy office that you paid for to show you how well your portfolio has done with lots of pretty charts. And in my scenario a client pays almost $750,000 in extra fees for this once-a-year meeting pleasure. As a bonus, odds are you have to travel to their fancy office for this meeting too. Hopefully the pictures of bulls and bears they have scattered throughout their office are really nice to look at. I mean, you helped pay for those too.

In case you were wondering, I meet quarterly with my clients. And all of our meetings are virtual so you can be anywhere, even the beach. And my office is not fancy, but gets the job done. My walls aren’t covered with pictures of bulls and bears. Just some personal photos and whiteboards.

We have talked about what this difference in client fees means to what you pay. More importantly, what does this mean for the overall growth of your portfolio. You have probably already guessed that the more you pay in fees has a more detrimental effect on your net worth. To keep things simple, I am assuming no funds were pulled out of this $3 million portfolio. Over 20 years with average growth, the value of the flat fee portfolio has increased to a little over $10 million. In the case of the AUM fee, which as it grows means you pay more and more and more in fees every year, the end result is a balance of just under $8.7 million, or $1.3 million less in your accounts.

I don’t know about you, but $1.3 million feels like real money to me.  So, you pay five times as much in advisor fees to have $1.3 million less in your portfolio. You’ve taken all risk and who pays the price? I’ll let you decide if that is a good deal.

Finally, there is the whole topic of investment fees. Next week we will talk about those. And just to be clear – even for those “free” investment products there are expenses to you.

Ultimately, this is why I operate under a flat fee arrangement. While internal investment fees will always exist, I do my best to be a little more forward-thinking and is why I am one of a very small number of CFPs who charges a single, flat fee based on my knowledge and experience.  And it is something my clients agree with too.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.