How To Pay For Financial Advice
I am going to do a quick breakdown of pros and cons of the four main ways to pay for financial advice. Quick disclaimer as I operate a Flat Fee financial firm and have been this way since I created it nearly a decade ago. There may some bias😉 Let’s get to it.
Benefits:
- Complete transparency with the fee you are paying. AKA – You know what you are paying.
- The fee is based on the advisor’s experience, knowledge and services provided.
- You are never on the clock.
- Follow Fiduciary concept of always putting client first.
Cons:
- You can’t say the sales pitch - “The better I do the better my advisor does.”
- Need to be careful of a bait and switch as too many “flat fee” advisors charge an additional AUM for managing investments (Disclaimer – I do NOT!)
Best For:
- Clients who want complete transparency.
- You want to connect the fee you are paying to the services you receive.
- A desire to know your advisor truly puts your interests first.
- Larger asset level who wants reasonable fees.
HOURLY FEE:
Benefits:
- Clarity on how much you will be paying.
- Great for small projects and limited engagements.
- Helps to put the client first.
Cons:
- Read above about the bait and switch for plan implementation.
- Worry about being on the clock for extra requests.
- Being sure things are getting done in a timely manner (not running up the clock).
Best For:
- Do It Yourself clients who want a second review.
- Clients with limited needs that don’t require a longer relationship.
- Wants a one-off analysis/help.
ASSETS UNDER MANAGEMENT (AUM)
Benefits:
- This is where your advisor charges you a percentage based on the investments they manage for you. Say 1.5%.
- You get to say the sales pitch – “If I do better my advisor does better.”
- Fees are often buried so you may not even have to worry about seeing what you are paying. 1 out of 5 investors think their advisor works for free.
- Good for smaller clients who end up paying a smaller fee.
- If you are a larger client you should get lots of attention since you pay a larger fee.
Cons:
- As your investments go up the advisor’s fee does. But are the services you receive going up too?
- Your advisor may always be on the lookout for that next larger client paying a bigger fee.
- Potential lack of fee transparency and/or confusion.
- Are fees connected to services received or knowledge of the advisor?
- Focus is often only on assets they get paid on, so maybe your 401k at work isn't discussed.
Best For:
- Clients who like the old school way.
COMMISSIONED-BASED
Benefits:
- Fees are usually hidden within the product you are buying.
- You won’t have to write a separate check for your fee as it will come out of whatever you buy.
Cons:
- Once you buy the product you may not hear much from the salesperson/advisor who sold it to you. They made their commission so there may not be an incentive to keep in touch.
- The Fiduciary concept of putting you first me be out the window. There may be an issue where a product paying a higher commission is the one recommended even though it may be no better than one paying the advisor less.
Best For:
- Someone who knows they need a commission-based product only and is okay with there being a commission. Such as a life insurance policy.
- A super old school person who prefers their advisor to be more of a salesperson.
All cynicism aside, there is a funding model for pretty much every potential client. I know I am biased toward the Flat Fee model since I left a larger firm to create my own Flat Fee firm. However, my select Physician clients like the Flat Fee model as it best matches their needs. My only advice is to ask questions on how your advisor gets paid and be sure you are comfortable with the arrangement.