Flat Fee or Assets Under Mangement - What is the Right Way to Pay a Financial Advisor?

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When is a one - off financial planning fee appropriate?

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When is a percentage of assets under management fee appropriate?

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Everyone has opinions about these matters 

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And today I’m going to share mine with you all.

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To begin - I believe that despite getting tons of lip service, 

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The substance beneath the “what should I pay for retirement planning or investment advice fee” question is rarely given the specificity it deserves.

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Why? 

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Because, in my opinion, most financial advisors

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Or retirement planners,

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 don’t actually have a great way to substantiate what they are providing.

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My opinion is that we should really be thinking of a financial plan or a retirement plan as a distinctly different product than investment advice.

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In the traditional financial advice landscape - 

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You the consumer

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Are gated from obtaining a plan or getting qualified advice until you form an assets under management relationship with an investment adviser.

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In other words - 

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You have to make one of the riskiest decisions of your life -

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Turn over investment direction of your lifetime accumulated savings

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To essentially a stranger

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Before you can get the answer to the questions

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When can I retire,

And

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What can I spend if I retire tomorrow…

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This is unequivocally a TERRIBLE pricing model

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That heavily favors the financial institutions at the expense of you

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The consumer.

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Now - 

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Does this mean that a percentage of assets under management is an inappropriate fee?

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In my opinion -

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No.

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An assets under management fee or AUM fee can be appropriate in many scenarios.

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It just should not be the STARTING point for the financial advice relationship

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Starting a relationship with an AUM fee would be like getting a new job and getting paid your annual bonus on day 1 -

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The incentive structures are totally out of whack!

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Earlier I said that i belive

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That we should be thinking about a financial plan as a distinctly separate service or product from investment advice.

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My opinion is that a plan is the first step of any process that includes risk.

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Your Financial Plan should INFORM and dictate how your investments are constituted.

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Not the other way around.

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Yet the majority of the industry would have you believe you should invest first and then plan your life around those investments…

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To me that is crazy.

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Thats like shooting the gun first and aiming later..

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The fundamental questions here are  -

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What problems should a financial plan seek to solve?

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And

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What problems should an investment relationship seek to solve?

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A financial plan should provide answers to the following questions -

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1. Based on when I want to retire, how much do  i need to save each year
2. Based on my current accumulated wealth, when is the earliest I can retire
3. Based on my desired spending in retirement, how much income will my retirement portfolio be responsible for
4. And based on the answers to all the above questions what investment rate of return do I need to target in order to make my plans a reality

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The Investment relationship should seek to solve the following problems:

1. How do I invest my funds in order to meet or exceed the target rate of return as determined by my financial plan?
2. How do I invest my funds in the best risk adjusted way to do that?
3. How often and how should I measure the risk of my investment portfolio
4. How and how often should I make changes to the investment composition of my portfolio consistent with my financial plan
5. How should I take withdrawals in the most tax efficient manner consistent with my financial plan
6. What recurring quarterly or annual activities should I / could I take with my portfolio to improve the risk to reward ratio of my investment portfolio consistent with my financial plan.

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The way I see it, all investment related concepts should be informed and dictated by ones financial plan.

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Ok - so how do I tie all this back to the pricing or fee question.

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Well - I see it quite simply.

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First - according to the logic I’ve laid out so far - the proper place to begin is always with a financial plan.

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Ok - so if we do intend to begin with a financial plan - 

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Whats the appropriate amount or way to pay.

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Well - the frist answer is -

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It’s never right to pay $0.

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Nothing is ever truly free.

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It’s either free because the quality will be poor and the risk you take on as a consumer is so high that the service can only be sold for free.

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Or its free because the provider knows they will make up for the cost of the effort on the backend in ways that you as a consumer are not aware of up front.

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To me, the appropriate financial planning relationship is one where it is either a flat fee or a quoted fee based on scope of work that is transparent and has no strings attached.

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This means a financial plan with a transparent price for the work and the deliverables with no attachment to any future investment relationship built into the financial planning agreement.

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This reduces conflicts of interest - the planner has to quote a fair and appropriate fee to deliver the plan, and the consumer (you) know exactly what you will pay and what you will receive in return.

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You as a consumer will get answers to those 4 retirement questions:

5. Based on when I want to retire, how much do  i need to save each year
6. Based on my current accumulated wealth, when is the earliest I can retire
7. Based on my desired spending in retirement, how much income will my retirement portfolio be responsible for
8. And based on the answers to all the above questions what investment rate of return do I need to target in order to make my plans a reality

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Then, a separate working agreement with a separate fee structure can be engaged in for an investment relationship.

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In fact it is actually my opinion that in the optimal scenario one would work under two arrangements with the same financial provider  - 

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A primary, entry engagement for a financial plan that helps provide the plan, the education, and establish a relationship based on competence.

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If the work of building the financial plan with the professional proves that that person or company has the expertise, the quality of character, and the competence to provide a financial plan that solves the key retirement problems, then it may make sense to use that same professional for an investment relationship -

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If you are indeed even seeking an investment relationship.

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And if you are seeking an investment relationship to delegate those core investment activities - then yes, an AUM fee in my opinion is the appropriate fee.

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To be clear - 

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It is totally ok to want a financial plan without an investment relationship -

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And the manner that I've described above allows that.

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But if you want an investment relationship because you do not want to be responsible for those 6 key investment outcomes, 

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Then my opinion is we want to avoid discount investment services.

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Because it will inevitably be the case that a discount service will eventually need to reduce their level of service or individual attention as their client base grows.

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If you like me agree that an investment relationship is a big risk

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And that we should go through great pains to not only determine if it is warranted but also to determine who that professional should be

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Then an aum fee is actually an exceptionally good partnership model.

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The advisor can manage their capacity and provide more individualized attention to each client

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The client can sleep well at night knowing that the advisor will not overload their client book in pursuit of discount fee clients.

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Again, to be clear -

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Just because an investment advisor charges using an AUM fee does not make them a good investment manager or financial planner.

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BUT - using a process like what I’ve described today- 

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Starting a relationship via a paid financial planning engagement with no commitment to an investment relationship 

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And then using that financial planning relationship to “try before you buy”

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To qualify the competence but more importantly the quality of character of the professional

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Is in my opinion the optimal way to pursue the best financial plan, investment advice, and professional partnership.

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If you’d like to learn more about the financial planning process we use with clients at peak financial planning, I’ve released a completely free webinar that you can view using the link in the description to this podcast or video.

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Anyhow - thanks as always for your time and attention through this exploration of financial advice fees. See you in the next video.

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