In the complex world of financial planning and investment management, one crucial question often goes unasked: How does your financial advisor get paid? The answer to this question can significantly impact the quality of advice you receive and, ultimately, your financial success. This white paper explores various fee structures for financial advisors, with a particular focus on how flat fee-based advisors provide a superior structure compared to traditional fee-only Assets Under Management (AUM) managers, especially for clients with higher net worth.

Understanding Financial Advisor Fee Structures

Financial advisors typically employ one of the following fee structures:

1. Commission-Based: Advisors earn commissions on the financial products they sell. This model can lead to conflicts of interest, as advisors may be incentivized to recommend products that pay higher commissions.

2. Fee-Only AUM: Advisors charge a percentage of the client's assets under management, typically ranging from 0.5% to over 1% annually. This structure aligns the advisor's compensation with the growth of the client's portfolio, but it can become expensive as the client's assets grow.

3. Flat Fee-Based: Advisors charge a fixed fee for their services, regardless of the size of the client's portfolio. This can be an annual fee, a monthly retainer, or a fee for specific services.

The Drawbacks of Fee-Only AUM Structures

While the fee-only AUM structure has been popular due to its alignment of interests between the advisor and the client, it has notable drawbacks, particularly for high-net-worth individuals:

1. High Costs: As the client's portfolio grows, the fees increase proportionally. For example, a client with a $5 million portfolio paying a 1% fee would incur $50,000 annually in advisory fees. This can significantly eat into investment returns over time.

2. Potential Bias Towards Asset Gathering: Advisors might prioritize increasing the assets under their management, potentially leading to advice that encourages clients to consolidate more assets with the advisor rather than diversifying or exploring other financial strategies.

3. Lack of Focus on Holistic Planning: Fee-only AUM advisors might concentrate more on investment management, potentially neglecting other crucial aspects of financial planning such as tax planning, estate planning, and insurance needs.

 

The Advantages of Flat Fee-Based Advisors

Flat fee-based advisors offer a compelling alternative, particularly for high-net-worth clients. Here’s why:

1. Cost Predictability and Transparency: Clients know exactly what they will be paying for advisory services, which can make budgeting easier and provide greater peace of mind. There are no surprises or hidden costs, and fees are not tied to portfolio performance, eliminating any potential conflicts of interest related to asset accumulation.

2. Alignment with Client Interests: Since the advisor’s compensation is not tied to the size of the client’s portfolio, they can focus more on comprehensive financial planning. This includes tax strategies, estate planning, retirement planning, and other financial goals that are crucial for high-net-worth individuals.

3. Holistic Approach to Financial Planning: Flat fee-based advisors are often more inclined to provide thorough and unbiased advice across all areas of a client's financial life. They are not solely focused on investment management but take a broad view of the client’s financial health.

4. Potential Cost Savings: For clients with substantial assets, flat fees can be more economical compared to the percentage-based fees of AUM models. Instead of paying a percentage that scales with portfolio size, clients pay a consistent fee, which can result in significant savings as their wealth grows.

 

Case Study: High-Net-Worth Client

Consider a client with a $10 million portfolio. Under a traditional AUM model charging 1%, the client would pay $100,000 annually in fees. At Sevey Wealth, we offer a flat fee-based fee structure of $10,000 per year for comprehensive financial planning services, offering substantial savings while providing more comprehensive and unbiased advice. Does the traditional advisor do 10x more work for the 10x fee they charge? In our opinion, they certainly do not!

Conclusion

Choosing the right fee structure for financial advisory services is crucial, especially for high-net-worth individuals. While traditional fee-only AUM models have their merits, flat fee-based advisors often provide a superior alternative for High Net Worth families. They offer cost predictability, eliminate conflicts of interest related to asset size, and deliver comprehensive financial planning services.

As you evaluate your financial advisor or consider hiring one, ask yourself: How does my advisor get paid? The answer can make a significant difference in your financial well-being.

 

About Us

At Sevey Wealth, we pride ourselves on offering transparent, flat fee-based financial advisory services tailored to meet the unique needs of high-net-worth clients. Our holistic approach ensures that every aspect of your financial life is considered, providing you with peace of mind and a clear path to your financial goals.

 

For more information or to schedule a consultation, please contact us at 512.647.8886 or via email at sean@seveywealth.com. You can also visit us at www.seveywealth.com.