A Transparent Look at “Fee-Only” Financial Advising

There are so many different types of “financial advisors” in the marketplace, there’s no wonder that many folks lump them all together into one. Tell someone you’re a financial advisor at a party and they’ll either ask you for your latest stock tip, or they’ll quietly shift their wallet to their front pocket so they can keep an eye on it! In my experience, sadly, the latter is probably the more rational response!

Navigating the crowded market for financial advice

In all seriousness though, there are important differences in how different “advisors” are qualified and incentivized that can have a real bearing on the type of advice and level of service you receive.

While no model is perfect (more on this below), the flat fee-only model provides transparency and a basic alignment of incentives between the client and the advisor. You deserve excellent, transparent, unbiased advice that’s centered on your best interests alone. This is especially true when missteps could affect your ability to retire, provide for loved ones, or pursue a full and meaningful life.  

What does “flat fee-only” mean?

As a “fee-only” financial advisor, I don't receive compensation by recommending certain investments over others, or by selling you insurance or annuity products. There are no commissions, no kickbacks, no referral fees, no sales loads, and no hidden charges.

The “flat” part refers to the fact that I charge a fixed amount for my services, which includes investment management. The fee is agreed upon upfront and is based on the complexity, time, and resources required to serve each client’s needs.

This is in contrast to the traditional Assets Under Management fee structure (or AUM model), where the advisor charges a set percentage (typically 1%) of the total assets that the advisor invests for the client. The AUM model is still the norm among fee-only advisors; however, flat-fee is gaining in popularity.

I chose the flat-fee model because it enables me to serve a wider range of clients in different financial situations by untethering the value of financial advice from the size of the client’s portfolio. It also removes many of the conflicts of interest that still remain with AUM-based fees (more on these below).

My current advisor is not “fee-only” or “flat fee.” Is that bad?

The short answer is no, not necessarily. There are excellent advisors with high integrity that operate under models that are not “fee-only” or “flat fee.”

Keep in mind that “fee-based” is not the same thing as “fee-only,” as “fee-based” advisors can still receive commissions or kickbacks (as if this wasn’t already confusing enough!).

If you are clear on how you’re being charged and comfortable with the cost compared to the level of service, that’s great! That said, it can be difficult to ascertain exactly how much you're paying when your advisor’s compensation is buried in mutual fund sales load charges, ongoing commissions from insurance product renewals, or referral fees that are kicked back to the advisor.

These practices are not inherently bad, and a good advisor will always be up-front about them, but ask yourself, “What incentives do they provide?” Is my advisor focused on my entire financial picture, or are they just looking to gather my assets or sell me products?  Is he recommending a certain trade or product because it generates a commission for his firm, or because it's truly the best investment for me?

What’s the downside of the AUM fee model? Why did you choose to be flat fee-only?

No model is perfect, and this includes fee-only, whether flat-fee or AUM-based. With growing awareness of the fee-only model, big broker-dealers and wirehouses have taken notice and are starting to offer their fee-only services based on a percentage of assets under management. I believe this is a step in the right direction and applaud the added transparency, but there are still downsides to the AUM fee model that should be put out in the open:

• AUM-based fees incentivize asset gathering over financial planning: when an advisor is compensated solely based on the number of assets under management, they are incentivized to increase their AUM. On one level, this is both obvious and seemingly a good thing: the advisor is incentivized to grow my assets and not lose them! But many fee-only advisors spend the bulk of their energy gathering new clients rather than providing ongoing comprehensive advice. There’s also an inherent conflict of interest when it comes to advising on questions like “Should I rollover my 401(k) to an IRA that’s managed by my advisor,” or “Should I liquidate my company stock purchase plan?”, or “should I take some of my savings and invest it in this business venture or investment property?”. The answers to each of these questions will have a direct impact on an AUM-based advisor’s compensation. That is not to say that these inherent conflicts of interest cannot be managed well, or that a certain advisor does not have your best interest in mind just because the recommendation they are making would also increase their bottom line.
  
  As a “flat fee-only” advisor, my compensation will not change based on how I answer questions like the ones listed above. At Oakleigh, we believe comprehensive financial planning is the core value we provide to our clients, and it encompasses all aspects of your financial life, and investment planning is a vital piece of the puzzle and is included in every financial plan. However, with the rise of various technological solutions, it has never been easier or less expensive to implement sound investment strategies for individuals and advisors alike. I chose the flat fee model for Oakleigh to reduce the possibility of conflicts of interest (real or perceived) and to better align my fees with the true value of the services that I provide.
  

• AUM fees may not align with the actual cost of providing service: As wealth increases, so does financial complexity (and the potential financial benefits of having a solid plan). But it’s not exactly a fixed proportional relationship between the number of assets and the cost of providing the services that an AUM fee suggests. Is managing a $750k portfolio really 50% more costly and complicated than managing a $500k portfolio?
  
  To better align the fees you pay with the actual cost of serving you, at Oakleigh, our fees are tiered and based on complexity. While complexity is certainly correlated with a net worth or investable assets, clients with the same net worth can have very different needs and require very different services, and our fees will reflect that. Where you are in your career, your proximity to retirement, whether or not you’re a business owner, your tax situation, your investment mix, and your family situation are all taken into consideration when I quote a fee. Your fee is guaranteed not to increase for the first two years, at which time we’ll reevaluate your needs and our services.
  

• Fee-only advisors cannot sell insurance: Insurance agents make money by selling insurance products (no surprise there). They are generally paid a commission when they sell a policy, and a smaller amount each year you renew your policy. Anyone who bills themselves as a “fee-only” financial advisor cannot also receive income from commissions. Commissions are not inherently bad, but they do create a situation where your interests may not be aligned with the insurance agent who doesn’t get paid unless you purchase a policy. He or she may get paid more for selling certain policies over others.
  
  As a licensed insurance consultant and CERTIFIED FINANCIAL PLANNER professional, I have the necessary expertise and credentials to review your current insurance policies and provide recommendations for the types of coverage you need. I have relationships with a handful of reputable insurance firms who can provide quotes and write policies if needed, but I receive no commissions or referral fees of any kind.

• For some people, the flat fee is too expensive. For others, it seems too good to be true! As the saying goes: “You can’t please all the people all the time!” Indeed, providing high-quality advice that’s tailored to your situation and puts an emphasis on education takes time, and our fees may be out of reach for many individuals. This is lamentable because I believe that access to an excellent financial education should be available to everyone. That’s why I’m passionate about sharing my knowledge through community outreach as well as continuing to write articles for this website.
  
  On the other end of the spectrum, I’ve had individuals question why my fees are so much lower than other advisors they’ve spoken to or worked with in the past. For comparison, the average fee on a portfolio of $1M is about 1% or $10,000 per year. For a portfolio of $2M, the average fee is a little under $20,000 or just under 1% of the total assets. My fees typically come in lower than those benchmark rates for individuals with larger portfolios, and that’s because I’ve tried to create a fee structure that reflects the complexity, time, and resources required to serve each client. Technology has also drastically changed the cost structure of implementing customized, diversified, risk-appropriate, investment portfolios, so I don’t need a large back office to support my investment management services. Could I charge more? Probably.

What is a Certified Financial Planner?

Anyone can call themselves an advisor or a financial planner, but CFP® Professionals must have met rigorous qualifications including completing advanced coursework, gaining 6,000 hours of relevant experience, and passing a 7-hour comprehensive exam.

A CFP® Professional is bound by high ethical standards and must act as a fiduciary by always putting the interests of the client ahead of their own. Having the CFP ® marks does not guarantee the quality of the advice, but it is a meaningful marker of aptitude, experience, education, and a commitment to professionalism.

I created Oakleigh with a mission to serve all of our clients with holistic financial advice and ongoing value. My focus is on serving my clients and growing their overall well-being throughout a long-term relationship. I believe in being transparent and acknowledging conflicts of interest upfront and managing them with integrity.

Are you interested in a free consultation? Click Contact Us below or at the top of any page to reach out.

For more information on our tiered fee offerings, click here.