Flat Fee Financial Advisor
Finances Are Complicated Enough. Your Fees Should Not Be.
Quick Read:
The fee you pay a financial advisor should not be based on how much money you have (percent trap)
Conversely, your financial advisor should not be “free” with the assumption you will buy a product (commission trap)
The fee you pay should be based on the complexity of your situation
Flat fee financial planning allows you to select the level of service you need
#1: The Percentage Trap
There is probably no other industry that makes their fees as clear as mud as the financial industry.
We founded Derive Wealth to change the way financial advice is delivered. That means not only how we provide advice, but also how you pay for it.
Think about it. How many things do you pay for based on the amount of money you have? Not many.
Unfortunately the percentage-based trap is the most widely accepted fee structure to work with a financial advisor.
Trap #1: Percentage Based Fee
Your fees should not be based on how much money you have.
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.Working with a financial advisor under a percentage-based agreement may seem logical at first.
The math is true to its name: you pay a percentage of your account balance. The most widely adopted percentage hovers around 1% annually.
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 due to your advisor’s investment recommendations, 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 your own doing? What if you just saved more, sold your home, or received an inheritance?
Your fees will increase as your balance increases. However the increase had nothing to do with your advisor’s skill or stock market performance.
Rising Fees
Percentage fees increase simply by adding money into your account.
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.
Worse yet, the investment strategy to invest your initial $500k may be the exact same as to invest $800k.
Your fee increased substantially however the complexity did not.
Conflicts of interest
It gets even worse, unfortunately.
Even if you were okay with paying the higher fees, lets assume you now need to take a withdrawal.
You would like to purchase a home and ask your advisor if you should pay with cash or take a mortgage. To minimize your mortgage, you are thinking about taking $400k out of your account.
Doing so will drop your account balance to $400k and cut your advisor’s fee by 50% to $4k. They are now faced with a conflict of interest.
Are they willing to take a 50% cut in their fees?
To think these potential reductions in fees do not influence your advisor’s decision is unrealistic. It will play into the advice you receive.
Avoid the conflict altogether and don’t fall into the percentage trap.
“The flat fee approach is not only more transparent, it also removes most conflicts of interest.”
What’s Really Going On
So why are percentage-based fees so popular? Most advisors want you to believe:
1% “sounds” insignificant (no direct dollar figure)
It is not that much (percentage fees are not easy to calculate)
No check or credit card payment (fees are deducted directly from your investment account)
The first two points are valid. 1% sounds like an insignificant amount. Most investors do not grasp the actual cost of percentages.
An advisor informing you it costs 1% of your account balance to work with them sounds better than saying your fee is $5k annually.
Additionally, percentage-based fees are often taken directly from your investment account. No check to write or credit card to charge. The transaction is seamless and effortless on your end.
The reality is for some the transaction is completely under the radar.
Taking into consideration a fluctuating percentage fee that is complex to calculate and buried deep in your investment statement, you would think no one would sign up.
But the opposite is true. It is the most common approach to working with an advisor.
#2: The Commission Trap
There are some investors that feel financial advice should be free. Interestingly, the financial advice industry does not argue this point at all.
The logic of free advice should be obvious to most. If you are not paying for the time and effort of your advisor directly then you are “paying” by purchasing the products they offer.
Advisors who offer free financial advice do just this. Instead of charging clients directly for their financial advice, they influence their recommendations based on the product suite that compensates them via commission.
Bingo. The creation of "free" financial advice.
Trap #2: The Company Product Pusher
You pay for financial advice by purchasing 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 for selling it to you.Here is how it works.
A commissioned financial advisor gets paid by selling products. Regardless of the help you need, the advice you will receive can 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
Pretty much anything with the word "annuity" or "insurance" in it will carry a commission. These products generally can be helpful to you. But misused and it could lead to significant buyer remorse.
How It’s “Free”
The business model is easy to understand. A “free” financial plan by itself does not provide much value. It is the recommendations and actions you take that make a financial plan useful.
For a commissioned advisor, those recommendations will be geared toward purchasing a product. The financial plan is used as a marketing tool to justify their product recommendations.
What appears free to you is actually just a creative way to sell more products.
How Lucrative Are Commissions?
Advice :
$500k
Annuity Purchase
Cost to You:
$0
No Cost To You
Commission:
$45k
9% Commission
Example: A commissioned advisor recommends you purchase a $500,000 annuity. Unknown to you, the commission is 9%. Your advisor's payday is $45k for selling the annuity to you.The numbers are staggering.
Lets 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.
“The surrender charges and lock in periods can handcuff you for years and even decades. Often the higher the commission, the longer the surrender charge.”
What’s Really Going On
The trap is obvious: the financial help you need will be solved with a product to buy.
If you need to save for retirement: purchase an annuity. Need to save for college? Do so within a life insurance policy.
If you actually need these products then it may be a good fit. However, most of the time there are alternatives beyond commissioned products that are suitable for you.
There is a better way.
The Flat Fee Approach
Our flat fee structure is designed to be 100% transparent. Our fees are not dependent on how much money you make or how much money you have. Instead, our fees are based on the complexity of your situation. The benefits of working with a Certified Financial Planner™ on a flat fee basis are plentiful:
Easy To Understand
Our flat fees are charged monthly and can be paid by credit card. It does not get any easier or more transparent than that.
Additionally, our fees are all-inclusive, covering both your financial planning and investment advice. The only additional fees you may incur are trading costs by the custodian you select.
Remove Conflicts of Interest
By removing the percentage and commission approach to providing advice, we are removing a significant amount of conflicts of interest.
We are agnostic to how much money you add or remove from your accounts. If you need any products, we are indifferent to the company you select or the method in how you purchase.
Our only goal is to provide relevant advice to get you to your goals more efficiently. We have no other alternative motives.
Three Pricing Levels
We offer three pricing levels depending on the complexity of your situation. Visit our flat fee pricing page to see what level may be right for you and customize a personal proposal.
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