3 Reasons You Should Choose A Flat Fee Financial Advisor

Many financial advisers charge their fee based on the value of your investment account and the going rate is generally around 1%. Here’s a little-known tip: If your investment accounts exceed $1 million, a flat fee financial advisor could make a lot more sense for you.

The way consumers have paid for financial advice has changed a few times within the past few decades. For many years the only way to get access to the stock market was through a “broker” who would place trades for you in exchange for a commission. As access to the stock market became easier through the internet, the financial services industry pivoted to charging clients an advisory fee based on the assets under their management. This shift helped to get rid of the inherent conflicts that were present for the “I only get paid when I make a trade” commission-based model, but the AUM advisory fee model wasn’t without conflicts either.

Ultimately, many investors who were paying a percentage based advisory fee started to ask a few questions like:

• Does my $3 million dollar portfolio really require three times as much work as someone with a $1 million dollar portfolio?
• Why does my advisor never want me to spend my money?
• Why does my financial advisor charge me more than my CPA and attorney combined?

Fair questions, right?

Enter an advisory model that is quickly gaining momentum: The flat-fee financial advisor. For those with larger account balances, this could be an excellent choice for three key reasons.

1) Flat Fee Financial Advice Reduces Conflicts of Interest

Financial decisions should always be guided by your best interests, without external influences. Advisors who charge a percentage of assets under management often face a big conflict of interest – their income is tied to the size of your investment portfolio.

Consider this scenario: A client finds their million dollar dream house, strategically located near family. They seek advice on whether to pay cash or finance the property, a significant financial decision. If the advisor charges a 1% fee, a decision to reduce the account balance by $1 million could result in a $10,000 annual revenue loss for the advisor. While ethical advisors try hard to provide unbiased advice, the simple truth is that a revenue loss of that size can at least subconsciously influence their recommendations.

Another common conflict that’s minimized with a flat fee arrangement is the correct portfolio allocation. For example, let’s assume that you’ve saved enough to achieve your retirement income goals without taking very much risk. If your advisor’s compensation increases are based on your portfolio growing, the temptation is there to increase your risk level – even if you don’t need the risk.

Flat fee financial advisors can freely operate without these conflict of interest. With their compensation remaining fixed regardless of your investment decisions, they can offer objective financial guidance focused solely on your financial well-being. This alignment of interests ensures that your advisor’s recommendations are driven by your goals, free from external motivations based around compensation.

Interestingly, the industry has done an excellent job of positioning the AUM advisory fee as a model that aligns the interests of the client and advisor. The “when we do better, you do better” slogan suggests that the AUM advisor has a vested interest in how well your investments are performing, theoretically giving them greater motivation to invest your money well. But wait…what about THE FIDUCIARY DUTY?!? A fiduciary advisor is ethically bound to act in your best interests regardless of how they’re paid.

2) Greater Focus on Planning

In my observations, the advisors who offer their services on a flat fee basis will often have a much deeper focus on planning. There’s just something about disconnecting the fee from the investment portfolio that shifts the focus of client interactions from the typical “portfolio review and market update” to conversations that are more geared towards taxes, distribution strategies, Social Security, and other financial planning topics that are much more controllable than the market.

The flat fee approach de-emphasizes the idea that financial advisors have some secret sauce that results in better investment performance. It’s not that the flat fee financial advisor doesn’t care about investment performance – they do, as this is the fuel that powers the plan – but they realize that their contribution to the relationship has to be greater than buying index funds for 1% and then taking credit for the increases to the market.

By adopting this approach, flat fee advisors focus on adding value in areas where they can truly make a difference. They spend more time crafting personalized financial strategies that encompass more than just investment choices.

3) The Fee Is Generally MUCH Lower

This point might seem straightforward, but its implications are profound. Traditional asset-based fees, while appearing modest at a glance, can accumulate to a substantial amount over time, significantly impacting your financial wealth. To put this into perspective, let’s consider a real-world scenario.

Imagine a portfolio worth $2,000,000. Suppose the owner plans to take a 4% annual distribution for living expenses, increasing this amount by 2% each year to keep pace with inflation. Over a typical 25-year retirement period, a seemingly small 1% advisory fee would sum up to an astounding $650,909. This figure alone is eye-opening, but the true cost becomes even more striking when you factor in the opportunity cost of these fees.

Now, let’s compare this with a flat fee advisor charging $10,000 annually, adjusted upward by 3% each year for inflation. Over the same period, this would amount to $364,593. At first glance, you’re already seeing a direct saving of $286,316. However, this calculation doesn’t yet account for the crucial element of the time value of money.

When you consider the impact of those extra fees remaining in the investment portfolio and compounding at an average return of 7%, the difference becomes even more staggering. The opportunity cost of the higher fees — money that could have stayed invested and grown — results in a total difference of approximately $707,363. This isn’t just saving on fees; it’s about significantly enhancing the long-term value of your portfolio.

In addition, with a flat fee financial advisor it’s much easier to keep track of your expenses. A typical AUM advisor fee is based on average daily balances or the value as of a certain date. With a flat fee, you know exactly how much will be charged every month or quarter, and you can easily double-check your costs with no complicated calculations. At any given time, you know how much you are paying and can constantly reevaluate if the cost is worth the value.

By choosing a flat fee advisor, you’re not only simplifying your financial management with a predictable cost, but you’re also preserving and potentially increasing your wealth in a much more substantial way. This approach can make a massive difference in your financial trajectory, especially over the long term.

Note: If you want to see the difference in fees between a flat fee financial advisor and a % of assets advisor, use my Fee Impact Calculator.

Who Should NOT Use a Flat Fee Financial Advisor 

It’s important to understand that a flat fee financial advisor may not be the ideal choice for everyone, particularly for clients with smaller investment accounts. For these individuals, the cost-benefit analysis of a flat fee structure versus a traditional assets under management (AUM) model can tilt in favor of the latter. In scenarios where investment needs are straightforward and the portfolio size is modest, AUM fees might actually amount to less than a standard flat fee. This becomes especially relevant for clients who do not require extensive financial planning services.

If your financial needs are primarily centered around investment services, and you don’t foresee a need for ongoing, comprehensive planning advice, an ongoing financial advisory relationship may not be necessary. Instead, a more suitable approach could be engaging an advisor on an hourly basis. This way, you can obtain professional guidance to develop a sound portfolio allocation and then manage it independently, only checking in with the advisor occasionally for reviews or adjustments.

This model can be particularly effective for self-directed investors who have a good handle on their financial goals and are comfortable with managing their own investments. It offers the flexibility of professional input without the commitment or cost of ongoing management fees.

Ultimately, the choice of a financial advisor — whether flat fee or AUM — should be guided by the complexity of your financial situation, the level of ongoing support you require, and the overall value you expect to derive from the advisory relationship. While flat fee advisors offer the benefits of transparency and comprehensive planning, they are most advantageous for those who will actively utilize the full range of services provided.

How To Find A Flat Fee Financial Advisor

There are a growing number of financial advisory firms who charge flat fees—including my firm. Our firm is open to new clients with investable assets between $1 million and $12 million who want to engage with an experienced team of retirement experts for a flat fee. If you want to talk, get in touch here. For other options, my friend Andy Panko has a list on his website of financial advisors who charge a flat fee.

Ultimately, the decision to choose a flat fee financial advisor can significantly impact your financial journey. By reducing conflicts of interest, focusing on comprehensive planning, and generally offering much lower fees, these advisors align closely with the interests of their clients, particularly those with substantial assets. This model not only promotes transparency and predictability in costs but also ensures that your financial plan is tailored to your unique life goals and circumstances.

However, it’s crucial to remember that this model isn’t one-size-fits-all. For those with simpler financial needs or smaller portfolios, other advisory structures might be more suitable. The key is to find an advisory relationship that matches your financial complexity, needs, and the value you seek.

As the financial landscape continues to evolve, so do the options for financial advice. If you find yourself in the group that could benefit from a flat fee advisor, I encourage you to get in contact with me and my team to have a conversation about how our services match your expectations.