Flat Fee Financial Advisor
Take A Closer Look Into What Makes The Flat Fee Model Unique
Quick Read:
There are a variety of terms used to define how a financial advisor gets paid
A Flat Fee Financial Advisor does not sell products or charge a percentage of assets
By charging a fixed fee, conflicts of interest are eliminated
There are situations where the flat fee model may not be the most suitable option
What is a flat fee financial advisor?
The financial planning industry has evolved to provide a growing list of services to clients. That has created various industry labels to define how financial advisors not only offer those services but also get paid. While the label “Financial Advisor” has become universal, a lack of true transparency on how a financial advisor gets paid has created confusion for potential clients. Our goal is to elaborate on each compensation model to ensure a proper fit and provide comfort in hiring the right advisor.
A Flat Fee financial advisor charges a single fixed fee based on the complexity of your situation, not the amount of money you have. The single Flat Fee covers all services offered within the scope of financial planning and investment management. A Flat Fee financial advisor also does not sell products or receive commissions.
From an easy-to-understand standpoint, Flat Fee advice shines. It provides full transparency without the worry of additional or increasing fees based on how your finances evolve. To fully understand a Flat Fee financial advisor, we can dissect two other popular labels:
A fee only financial advisor works on a fixed fee or percentage of assets basis. Selling products are prohibited to use this label.
A fee based financial advisor is the same as a fee only however is allowed to sell products and receive commissions.
Conflicts of interest
The most significant benefit of working with a Flat Fee financial advisor is the removal of conflicts of interest. The recommendations to clients have zero influence on the fees paid to an advisor. Contrast that with a fee based or fee only advisor who work on a percentage of assets basis. Their advice may be influenced by the value of your account balance.
For example, the most widely adopted percentage structure is a 1% annual fee on investments or net worth.
Percentage Based Fee Structure
Start :
$500k
Investment
x
Advisor Fee :
1% Fee
Percentage Fee
=
You Pay:
$5,000
1% of Balance
Example: 1% fee on $500k balance equals $5,000 initial annual fee.As the example illustrates above, a 1% fee on a $500,000 investment account equates to a $5,000 annual fee. This structure is rationalized with the perceived “our interests are aligned” philosophy. If your account does better you pay more in fees. If the account decreases in value, so do the fees.
But what happens when your account balance goes up by factors outside of stock market growth? What if you saved more, sold your home, or received an inheritance? Your fees will increase as your balance increases with often little, if any, changes to the overall advice or strategy.
Percentage Fees Increase Simply By Adding Money
Add in $50k Bonus:
$550k
1% Fee: $5,500/yr.
Add in Inheritance :
$800k
1% Fee: $8,000/yr.
Increase in Fees:
60%
$5k to $8k in Fees
Your fee has increased 60% from $5k to $8k by investing a bonus of $50k and inheritance of $250k on top of your initial $500k.The higher your account balance grows, even if it has nothing to do with stock market performance, the more you pay. Lets assume you invest a $50k bonus on top of your initial $500k starting balance. Your account balance is now $550k and your fee has increased by $500 annually.
Next you receive a $250k inheritance and decide to invest the full amount. With an account balance now at $800k, your annual fee has increased to $8k. That is a 60% increase from your original $5k fee just by investing your bonus and inheritance.
The assumption is the increase in fees offset the additional costs to manage a larger account balance. However, often your initial investment strategy is the exact same as your balance grows.
Now lets assume a withdrawal is needed to purchase a home. You ask your fee based or fee only advisor if you should pay with cash or take a mortgage. They are now faced with a conflict of interest. Are they willing to take a cut in their fees if you liquidate your account?
“The flat fee approach is not only more transparent, it also removes most conflicts of interest.”
Commission Based Fee Structure
A commissioned financial advisor gets paid by selling products. Regardless of the help you need, the advice you receive will be heavily influenced toward 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
indexed life insurance
share class or loaded mutual funds
What appears free to you is actually just a creative way to sell more products.
Free :
$0
Free Financial Advice
Advice :
BUY
Company Product
Commission:
$5,000
Product Commission
Example: Your purchase a $5,000 annual premium life insurance policy. The commission to your advisor could be as high as $5,000.Do Flat Fee Financial Advisors Offer Full Service Advice?
It is natural to think without the additional fees there must be lack of service or lower quality advice. Or there are hidden costs or undisclosed fees somewhere. With a fully transparent flat fee financial advisor, you can rest assured none of the above apply.
However if products are needed such as life insurance, annuities, homeowners insurance, etc., flat fee financial advisors partner with outside professionals to implement. Additional fees may be charged by them.
With the ability to partner, flat fee financial advisors offer the same full service as fee only and fee based advisors, with the added clarity of a fixed fee. The quality of service and advice provided by a flat fee financial advisor is not reduced or diminished at all.
When Is A Flat Fee Financial Advisor Not A Good Fit?
With all the benefits Flat Fee advising can bring, there are situations where it may not be the right fit. Due to the very nature of a Flat Fee structure, it may end up being more expensive than working with a fee based or fee only financial advisor.
For example, if you have $100,000 to invest and apply the standard 1% fee, your total cost of $1,000 is lower than a Flat Fee financial advisor who charges $4,200 annually. However, the percentage model can become more expensive as the account balance grows.
Additionally, Flat Fee financial advisors may have to partner with outside professionals to implement commissionable products such as insurance. If the sole need is to obtain these types of products, often it is more convenient to go directly to them.
Are All Flat Fee Financial Advisors the Same?
While fee structure is important, not all Flat Fee financial advisors provide the same level of service. It is important to research the capabilities of the potential advisor, specifically when it comes to the management of your investments.
Often Flat Fee financial advisors may focus on providing advice only and do not get involved with the investment management. The client is left to handle the trading, rebalancing, tax loss harvesting and overall day to day management.
“What makes Derive Wealth unique is we provide both financial planning and investment management for one flat fee.”
We are able to provide both financial planning and investment management by utilizing our custodian, Charles Schwab Institutional, and our comprehensive technology toolset. Our efficiencies allow us to help with all aspects of your finances.
Work With A Flat Fee Financial Advisor.
We are dedicated to helping individuals and families plan for their future using a transparent flat fee model. We encourage every prospective client to learn more about how it works:
Convenient Payment Options
Our flat fee is charged monthly and can be paid by credit card. Our fees are all-inclusive, covering both your financial planning and investment management.
Unbiased Advice
By removing the percentage and commission approach to providing advice, we are conflict free. How much money you have or make does not influence our fees.
Three Pricing Levels
We offer three pricing levels depending on the complexity of your situation. Visit our flat fee pricing to see what level may be right for you.