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EP 66 - Why I Built a Flat Fee Firm

It seems to me there is a huge potential in the financial services industry for conflict-of-interest issues, when advisors are allowed to charge clients based on assets under management (AUM). Why is this the case? Because those advisors are then motivated to keep the client’s assets under their control (because that’s what they are paid from) rather than doing what’s truly in the interest of the client. This episode I explain what I’ve decided to do about that potential downside and tell a story or two of how I got to that point.

You will want to hear this episode if you are interested in...

  • Why a flat-fee arrangement seems best to me [0:21]
  • My history is a bit outside the norm for my industry [1:18]
  • The compensation models that are typical, and how they can be problematic [2:45]
  • A day I’ll never forget that changed my perspective forever [6:38]
  • How I discovered the flat-fee model that I currently offer [7:55]
  • One goal I have for 2022: Hiking Half-Dome [9:56] 

Does it make sense to charge fees based on things outside your control?

I don’t think so. Here’s an example of what I mean and it has to do with the services provided. The services provided typically don’t change no matter what the clients are charging, so a client paying $2,000 gets exactly the same as the client paying $20,000.

Since the start of 2017 and October of 2021, a simple portfolio with 60% in the S&P 500 and 40% in an aggregate bond index has gone up 80%. If you were paying 1% to your advisor, your fee has almost doubled. Have your services you receive from your advisor doubled? They likely have not.

The day that forever changed my perspective on financial advisor compensation

I’ve come to believe that it’s appropriate to charge my clients based on my knowledge and experience, not based on what I’m able to sell (annuities, other insurance policies). It also seems appropriate that I NOT charge my clients based on things outside my control, like the market. My focus should be on bringing value to my clients’ financial lives by focusing on their goals, helping them manage and mitigate taxes, wisely use their social security, establish and manage 401(k) plans, do proper estate planning, and wisely invest their equity compensation plans. In short, I’m valuable to my clients when I can use my knowledge to help them improve their lives.

The day when my views on my compensation changed is one I’ll never forget. The lead advisor in the small firm where I worked was out of town on a month-long vacation. I took a call from one of his clients. This man was calling about his aging father, who wanted to take funds from his retirement funds that were under management with our fund for a very specific and noble reason: he wanted to do some gifting in memory of his recently-deceased wife. I thought it was a great idea and assured him we’d be there to help him make it happen. 

Later, when the lead advisor called in, I mentioned the situation. His response shocked me. He said, “I cannot lose those assets.” The advisor was speaking in his own best interest, not considering the client’s best interest or wishes. It’s a huge conflict of interest in my mind. That’s when I resolved to figure out a better way to charge for my services. 

This week’s FLASHBACK: 

My goal is to hike Half-Dome in 2022

Resources & People Mentioned

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.