Flat Fee Financial Advisors and Planners
As we have stated many times, it is crucial to understand how your financial advisor/planner is paid. The three basic compensation methods are commission, commission and fee, and fee-only.
In the commission model, the advisor is paid based upon the volume of transactions. For example, a mutual fund with a front-end load will pay the advisor upon purchase of the fund. The obvious problem with the commission model is that it incentivizes high turnover (churning). Given this conflict of interest, it is difficult, if not impossible, to see how a commissioned advisor can claim to be working in your best interest.
Worse than the commission model is the commission and fee option, as this allows the advisor to both collect commissions and charge the client an annual management fee. These advisors frequently categorize themselves as “fee-based”, which creates significant confusion for investors who are seeking fee-only advisors.
To clarify, fee-only advisors accept payment only from their clients, which is why they are the only type of advisor that should be considered fiduciaries. Within the category of fee-only, there are three types of compensation—asset-based, hourly, and flat.
By far the most common, the asset-based fee is calculated as a percentage of the assets you place with the advisor to manage. A commonly stated argument is that since the advisor is paid on assets, the advisor’s incentive is to maximize assets. Everybody wins! But do they? Certainly the advisor wins, but the client, not so much. Asset-based fees can be very expensive and become even worse as assets grow. To us, it makes no sense to pay an advisor based on something he has no control over—the performance of the financial markets. It can also lead to absurd situations such as a 20% raise in 2017 (based on the S&P 500 return). In fairness, it should be noted that asset-based fees decrease in a market downturn, but why should advisors receive a pay cut, especially during the time period when they are working their hardest to convince their clients to stay the course?
The hourly fee structure certainly has merit, as it’s consistent with how most financial professionals (e.g., accountants and actuaries) are paid when acting as consultants. One potential problem is the incentive to maximize the number of billable hours.
The flat, or retainer fee structure is the one we utilize at Clarity Capital Advisors because we believe it is the one that is most fair to our clients. While the level of assets is considered in setting the initial fee, it will not change based on market fluctuations. Advisors should be paid a fair, fixed fee (flat fee) based on the services they provide, their experience, and credentials. If you would like to learn more about how you can benefit from our flat-fee fiduciary wealth management services, please call us at 800-345-4635 or email us at email@example.com.