Why I Built a Flat Fee Financial Planning Firm, From Scratch

Since this is the first real article of the new year, I figured I would answer a question. Every so often I get people asking why I launched a financial planning firm that operates under a flat fee arrangement. I am going to give you the short answer and the longer one too.

How about we start with the short version. It is simply I feel it is appropriate to charge based on my knowledge and experience. It doesn’t seem right to me to charge based on what I can sell (this means selling commissionable products like annuities) nor does it seem appropriate to charge based on things outside of my control. You know, like what the market does.

Again, simple answer. However, I think it is worth expanding on that a bit more.

I came into this industry with a different background than most advisors. My degrees are in public administration. I have a Master of Public Administration from Ohio State. When I was in the program it was in the college of business at OSU, so we were all known as numbers people. This continued after I graduated and started working for local governments in west Michigan. Pretty much everything I worked with was related to finances, from budgeting to grants to economic development.

I worked in this profession for over a decade, but knew a few guys in the financial services industry who were recruiting me due to my background with finances. Local government work was great, but my wife and I wanted a job where it meant less moving around and that we could raise our two young sons closer to family, which meant moving back to Akron, OH. So, I made the shift.

I started at Merrill Lynch and spent five years there. After a few years I realized I did not want to be an employee for an organization that large. I had the chance to join a small investment management firm and I made the switch. It was here my eyes began to open toward a different way for clients to pay for my services.

While at Merrill Lynch and also with the small firm the focus was primarily on what is called AUM. This stands for Assets Under Management. Simply, you charge a fee based on the amount of assets you manage for clients. The more you managed the more you made.

The average advisor fee under the AUM model is 1%. This doesn’t seem like a lot, but if you have a $2 million portfolio you are paying someone 1% to manage the money, which is $20,000 a year. And this does not even count the additional fees for the investments themselves. These fees have come down over the last decade, but can still be close to another 1% if the advisor isn’t being diligent with investment choices.

As I spent more time in this industry, it seemed to me there was a disconnect about fees charged, services provided and who could be helped. And there had to be a better solution out there.

Let me shine a little more light on what I mean. Because most advisors charge under an AUM arrangement, they want clients with lots of assets. I totally get it. Obviously, smaller investors get ignored. However, people in my peer group of GenX also mostly get ignored. It is because we do not have enough assets AUM advisors care about. Our assets are tied up in workplace 401ks and equity compensation at our jobs. We are what you call 401k rich, but most AUM advisors can’t charge on assets outside of their control.

Another layer in this cake comes down to connecting fees to something totally outside of the advisor’s control – the performance of the market. AUM advisors love to say that by getting paid based on the value of the portfolio they have skin in the game. If the portfolio goes down they get paid less. If it goes up they get paid more. Again, it makes sense, to an extent.

The first thing with this arrangement that has never made sense to me relates to services provided by the advisor. I have seen time and time again how the client who pays $2,000 a year gets the exact same service level as the client paying $20,000 annually. Now, I am not saying one person should be getting more or less service than the other. What I am trying to explain is I have seen firsthand how the service level does not change based on how much an advisor manages. At least for most AUM advisors. Yes, there are exceptions, but most advisors set up one service-level for all clients. However, what they pay for this service can vary widely based on AUM fees paid.

The second part is the whole skin in the game thing. I shared this explanation recently. Since the start of 2017 and through 2021, a simple portfolio of 60% in the S&P500 and 40% in an Aggregate Bond index has gone up nearly 90%. If you were paying 1% to an advisor who managed your $1,000,000 portfolio you have seen the portfolio grow to almost $1,900,000. However, the fee you have paid them has almost doubled to $19,000 a year from $10,000. Have the services your advisor provides you doubled? If not, have they increased 90%? I bet not.

These are some of the things going through my head as I struggled thinking there must be a better way to provide my services as a CFP to clients. My value is not taking credit for the stock market, which no one should ever do. First, because we don’t control the market. Next, I have never in all my years seen an advisor take responsibility when the market goes down. That is conveniently always someone else’s fault.

My value is for helping clients’ overall financial lives through things like focusing on goals, taxes, Social Security, 401ks, estate planning, equity compensation, and more. Simply, it is using my knowledge and experience to help improve their financial lives.

Years ago, there was a day where the straw broke the camel’s back in my world. It was at my old firm. The lead advisor was on a month’s long vacation and a client called one day. I took the call since I was next advisor in seniority and in the office. The client mentioned his father, who was also a client, may want to take a few hundred thousand out of his account to do some gifting in memory of his recently deceased wife. I told the client we would be there to help his dad figure this out. Later in the day the lead advisor called in. I mentioned this conversation and the advisor’s reaction was – “I cannot lose these assets.”

This shocked me as the advisor was acting in his own best interest and not the client’s. This is a huge conflict of interest in my world when you get paid based on assets you manage. Too much focus on gathering assets instead of focusing on what is important to the clients. It was at that point I resolved to figure out a better way to charge for my services.

I ended up coming across an article about an advisor in Colorado who was charging a flat fee. His name is James Osborne. I reached out to James and he was kind enough to share his experience with the shift to a flat fee structure. All the reasons he made the change were the same reasons I was dealing with.

I realized to operate under a flat fee arrangement I needed to start my own firm. From scratch. I created Forward Thinking Wealth Management and have built it into what I consider a rather successful financial planning firm.

Over the years I have seen how people wanted a different way to pay for financial planning services. This I expected. What I did not expect was how many clients who are years away from retiring wanted these services too. However, as I mentioned before, these types of clients are often ignored by the traditional AUM advisor because their assets are tied up in their workplace plans so nothing to charge for AUM guys.

Ultimately, I have the firm I always wanted. I charge an annual fee of $8,400 regardless of asset size. This fee covers financial planning, investment management, tax minimization, and more. The important thing is my fee is based on the service I provide which is directly connected to my experience and knowledge. I can act as a true fiduciary where clients know they always come first.

And I also mentioned earlier, there is definitely an interest in flat fee advisors. My goal for 2021 was to add 4 clients. I met this goal twice over. That tells me there is a demand for a little more clarity. And dare I say it – something a little more forward thinking.

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.