Financial Advisor Fees

Finances Are Complicated Enough. Your Fees Should Not Be.

There is probably no other industry that makes their fees as clear as mud as the financial industry.

Take a look at how working with a flat fee financial advisor stacks up against the competition.

The AUM (percentage) Trap

 

Your Fees Should Not Go Up Just Because You Are More Successful

Think about it.  How many things do you pay for that are based on the amount of money you have?  

Not many, if at all. However this is the most widely accepted terms of engagement if you work with a financial advisor.

Fee-Based Advice

What has a 60/40 portfolio (60% in the S&P500 and 40% in an Aggregate Bond Fund) done over the last few years? Well, since the beginning of 2017 and through almost all of October 2021, this 60/40 is up just over 80%. More impressive is since the beginning of last year this simple portfolio is up 30%. That is even with the giant drop early in 2020 due to Covid.

Let’s look at a quick example. Assume your advisor is managing $1 million for you. And they charge you 1%, which is the average AUM advisor fee. This means you pay them $10,000 a year for their investment management services. And many of these AUM advisors only manage money. They don’t do things like financial planning, analyze taxes, discuss estate planning, and more. You know, some of the stuff I do with clients.

Now, if that $1 million has grown to $1.8 million over the last five years, you may now be paying your advisor $18,000. Almost double what you were paying them a few years back.

“The question I like to ask is – If your portfolio has doubled and the fees you are paying your advisor have doubled, has the service they are providing to you doubled?”

MOST ADVISORS WANT TO AVOID THIS CONVERSATION:

  • You – “I pay you 1% on the $200,000 you manage for me, right?”

  • Advisor – “Correct. That 1% is $2,000 annually.”

  • You – “”I am getting ready to retire and you want to manage my $800,000 401k balance at the same 1% fee. This would increase the fee I pay you 5 times from $2,000 to $10,000 annually. Explain to me in detail how you will increase your services 5-fold.”

  • Advisor – …….

Basically, only you can answer whether the services you receive are worth the increasing fees you continue to pay.

Commissions: The Good Ol' "There Is No Cost To You"

 

There is a group of people that feel financial advice should be free.  The financial industry knows this and has created the perfect solution.

Instead of charging clients directly for financial advice, why not provide access to a financial advisor for "free" as long as that advisor recommend the company's products?

Bingo.  The creation of "free" financial advice.

Commission-Based Advice

Here is how it works.  

At the end of the day, the commissioned financial advisor gets paid by selling company products.  Whatever your issue is, the advice you will receive will be heavily geared towards buying a certain product.

Here are the most common products that involve commissions:

  • fixed annuities

  • variable annuities

  • index annuities

  • universal life insurance

  • whole life insurance

  • variable life insurance

  • mutual funds

Pretty much anything with the word "annuity" or "insurance" in it.  These products, by themselves, are not bad at all.  But used in the wrong manner, and it could lead to disastrous results.

HOW IT IS "FREE"

Surrender Charges:

Company's are able to pay financial advisors a commission as in exchange, they put restrictions on the money you are giving them.  These restrictions are called "surrender charges." Surrender charges are the length of time the company gets to keep your money.  Usually based in years, the surrender charge is labeled as such that you are accessed a penalty if you want to withdraw your money early.

Surrender charges are important as it allows the company to pay the advisor a commission while still having enough time to make a profit.

Working on commissions can be very lucrative.  The percentages below are an example of how much your advisor could make based on the amount of money you give them.

  • 3 year lock up generally pays 5% commission

  • 5 year lock up generally pays 7% commission

  • 7 year lock up generally pays 9% commission

  • 10 year lock up generally pays 11% commission

So how much does your "free advice" really cost?

Let's say you have $500,000 to invest.  Your commissioned advisor recommends an annuity with a 7-year surrender charge.  There is no cost to you, you just can't touch your money for 7 years.

At that level, your advisor could receive a commission of 9% of your investment, or $45,000

12b-1 Fees:

These are fees paid out of mutual fund assets to cover the costs of distribution(advisor) – marketing and selling mutual fund shares.

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WHAT'S REALLY THE PROBLEM WITH THIS?

The main problem is this: every issue you have will be solved with a product to buy.

I call this the carpenter syndrome.  Give a hammer to a carpenter, and everything they see starts to look like a nail.

If you compensate a financial advisor by selling products, every client looks like a dollar sign.

The Flat Fee

 

The Way That Just Makes Sense

There is a Vanguard study which outlines how advisors can add value through relationship-based services such as financial planning, discipline, and guidance, rather than by trying to outperform the market.

Below are the results:

One Flat Monthly Fee

I am not the first to charge a flat fee pricing model. I am actually a “convert” from the AUM model. But now I can confidently say I provide my clients with massive value.

There is one flat fee. There is no percentage fee or commission products to buy.  The fee is structured around the advice you need and the value that I provide.

Working on a flat fee basis has additional benefits.