I ran across the chart below while reading an article about retirement plans. It quickly...
Three Ways To Charge As An Advisor Don’t Fall for Marketing Gimmicks from Financial Advisors
Our industry is full of marketing gimmicks and misleading representations by wealth management firms. One way they do this is by acting like one way to charge for something is always the best way. It just isn’t the case. There is a case for all three major types of pricing schedules in this business. If one is truly a fiduciary, versus just marketing themselves as one, they would leave the decision up to the clients after discussing the benefits and weaknesses of each type of pricing.
First, let’s discuss the issue of being a fiduciary. In our industry being a fiduciary means you put the client’s interest above all else. We are a fiduciary advisory firm based in Southlake. We always put the client’s interest first. We also offer our clients several different pricing options. We believe there is a case for all three. Let’s discuss those options.
Planning Only – Hourly Fee
This can be referred to as a fee-only financial advisor and sometime this is misrepresented as if it is the only fee-based option that looks out for a client’s best interest. Fee-based can be passive or active. Planning Only is passive. If a client only wants planning on items like retirement planning or estate planning, then this might be a fit for them. It might even, and should include, asset allocation. This is a passive way to manage an account. They typically aren’t making changes between the times you meet, let’s say semi annually or annually, unless they charge for it. No one is working for free. You should assume that every advisor has figured out what their hourly worth is and charges you for that time. If a Planning Only advisor makes changes to your plan, they have built into their fee schedule revenue for that time. Either in the upfront fee or an ongoing hourly fee.
My issue with an hourly fee is I don’t want my clients to feel like they can’t call me and talk without being charged. However, if you really are just looking for a plan and are okay with doing all the work once it is completed, then an hourly fee advisor might be a fit for you. I want, and encourage, my clients to call us if they have questions. This is where fee-based fits in.
Fee-Based – Percentage of Assets Managed
Like Planning Only, this is a fee-based pricing schedule. The difference is this fee is typically based on assets managed. This is active management. For our firm it also includes a plan. We think a plan should include 5 parts; tax planning, estate/legacy planning, risk management, retirement (or other major goal) planning, and money efficiency. Thus, we do a plan and then actively manage the wealth for our clients. No matter how many questions one has, the fee remains the same. If a client makes money, we make more money. If a client loses money, we make less money. Fee-based advisors are automatically fiduciaries due to the Department of Justice rules that require that we put the client first. We have always believed that was our priority and didn’t need the DOJ to tell us so. We aren’t alone here. No virtue signaling here. Many of my colleagues feel like we do in that the client should be put first. We, as with many of our competition, wouldn’t have built the businesses we have if we were in the practice of ripping off clients.
Oh my, the black sheep of the family. Many of my colleagues want to paint the picture that commission is evil. They wouldn’t dare do that. My question is why not if it was best for the clients? Yes, commission actually might be best for the client.
What if you want to set up a 529 college savings plan of $50,000 for a new born child that is 18 years away from college? If an advisor is plan only, they are getting ongoing payment over the next 18 years for giving you the advice on using that 529 plan. You must compare the total cost of the plan paid to a fee-only advisor vs a commission-receiving advisor because you might be shocked to learn you are paying more.
If they are fee-only, are they going to charge you a fee every year for something that doesn’t really require active management? Not only that, we invest in plans like this expecting the value to increase. You aren’t only paying a fee for way too many years, if it is successful, you are paying more and more fees for something that doesn’t need active management.
Or one could just pay a small commission upfront and then the advisor doesn’t make any money other than that.
Here is the important point on commission. The advisor, in my opinion, didn’t earn that commission if he didn’t present to you the several different options for saving for a child’s education. If he does, he earned that commission. No one should expect us to work for free. If he didn’t, what is he getting paid for?
There isn’t only one way to help a client. We can actually do all three of the options. We are also fiduciaries. If it fits a client best to do one over the other, then that is the way to go. Very seldom will it be commission based. That is the major exception. We just want the option in case it is best for the client.
Finally, no advisor is worth their salt, in our opinion, unless they are fully transparent in the cost of working with them, not only upfront but what one should expect going forward, especially for planning only.