What Is a Flat-Fee Financial Advisor?
Flat fees are one of the most common payment structures individual advisory professionals and firms use. Learn more about how they work here.
What does it look like to pay for financial advice? The answer to this question tends to vary by person and advisor. Expertise can come in all kinds of shapes and sizes. And, because of the vast range of services you could seek out and receive, you could encounter various payment structures.
It’s not uncommon for financial advisors to use a fixed or flat fee structure when you pay for their services. In this article, we’ll explain how this works and give you an idea of what kinds of services and experts use this model. In doing so, we’ll also lay out some pros and cons of working with a fixed-rate professional.
How a Flat-Fee Structure Works
A flat-fee financial advisor charges clients for services using only a fixed rate rather than for a commission or a percentage of assets under management (AUM). When you work with an individual or firm that uses this model, you’ll pay a single price for one or several services. This is the case whether you have a large, complex portfolio or simply want help planning the current year’s taxes.
The services you receive under a flat payment structure can be one-time or continuous. For instance, if you require ongoing portfolio or wealth management, a flat-fee advisor may charge a set annual rate where you pay either by the month, quarter, or one lump sum for the year. On the other hand, if you want a consultation to handle a specific need, like formulating a retirement plan, you would pay the basic rate for the appointment and nothing more.
Fixed-fee professionals are normally fee-only, meaning they don’t take commissions from products they recommend to clients. In this way, they often carry out a fiduciary duty and avoid potential conflicts of interest.
Should You Choose a Flat-Fee Advisor?
Deciding if a fixed model is right for you can depend on many factors, including your objectives and price range. Nick Lyons, a CFP with The Goff Financial Group in Houston, Texas, highlights that your needs and ability to manage your finances might inform your ideal fee structure, whether it’s a flat rate, AUM percentage, or another.
According to Lyons, “Depending on the need of the client, a flat fee schedule can be substantially less expensive than a traditional AUM-based fee schedule,” especially if you only need a certain service, like a check-in or advice before buying a home. Rather than taking on an annual, often expensive rate that’s calculated by a certain percentage — often around 1% — of your assets, a flat rate is more predictable and has fewer strings attached.
Your overall comfort level with managing various aspects of your finances is another important factor. Lyons points out that, despite its occasionally inexpensive nature, “the flat fee model usually requires more ‘heavy lifting’ from the client” and that it “suits hands-on investors who understand intermediate to advanced investment concepts.” Therefore, fixed fees are probably better if you prefer managing your portfolio yourself.
Since a fixed fee structure can add up in the long term (sometimes around $5,000 to $10,000 or more per year), it’s often true that you’ll receive guidance from your advisor and then use it on your own. By contrast, in an AUM percentage arrangement, the idea is that you’ll establish an ongoing relationship with your professional. Then, they’ll be by your side in the trenches with more time-intensive tasks, such as managing and analyzing investments and comprehensive financial planning.
Ultimately, settling on a fee structure is an important part of determining the nature of your relationship with your professional. You’ll have to keep a few crucial details in mind, such as how comfortable you are with handling financial tasks or how much you’re even willing to pay. To help you better understand your situation, ask yourself these questions:
- What services do I need? For one or two projects, a fixed-fee advisor might be a good fit. For long-term expertise? Unless you find a professional with competitive rates, as some may do for wealth or investment management, an AUM model may be more suitable.
- How comfortable am I managing my finances alone? Think about whether you’re able or willing to take on the responsibility of managing more facets of your finances. If not, you may need to consider a long-term payment schedule.
- What is my net worth? AUM models often cost less for high-net-worth individuals. So, if you have fewer assets, flat rates could be more cost-effective.
- What am I willing to pay for advice? The cost to hire an advisor can vary, but it often comes at a high price. Remember that flat rates can be expensive over a long period, while other structures can lend themselves more to continuous guidance.
Pros and Cons of Flat Fees
A fixed fee structure can be advantageous if you prefer to clear up any price speculation, only need a specific set of projects completed, and, in some cases, have solid financial knowledge. There are, however, some drawbacks to paying a predetermined cost. Below, we break down the pros and cons of flat advisory rates:
- Often fee-only. For the most part, experts offering fixed prices exclusively charge for services and don’t earn compensation by recommending products. This drastically reduces questions of conflicts of interest.
- Transparent pricing structure. These structures allow you to see and predict expected costs. You won’t get blindsided by additional fees or face paying more based on the amount of assets you have.
- Good for self-management. Per Lyons, “If you prefer to manage your portfolio but are looking for validation or a second opinion, a flat fee model may be better suited for your needs.”
- Freedom. In some cases, especially when you only pay by the project, these structures allow for more independence than other, more long-term advisor-client arrangements.
- Expensive over time. While paying a fixed cost for a service can be cheaper if that’s all you need, returning to the well more than a few times could add up.
- Lack of incentive. A flat-fee advisor makes the same amount whether you make nothing or double your money. Other payment structures, such as the AUM model, allow more incentive for experts to grow the value of your assets.
- Tough negotiation. Although negotiating is usually on the table, advisors using flat fees might stand firm on changing their prices. If they exclusively use this structure, they more than likely calculated amounts that are the most beneficial to their business, including overall value for customers and profit margin.
How to Find Flat-Flee Advisors
If you’ve landed on choosing an advisor with fixed fees, your next step will be to search for one. You’ll want to find one that aligns with your investment philosophy, serves clients with situations like yours, and has several years of experience. It’s also vital to emphasize hiring someone who follows a fiduciary duty. These experts will normally charge you fees for their services and nothing else.
A great way to start looking for a financial advisor is by using matching tools, such as this free one. It will ask you some questions to clarify your needs and situation. Then it will present you with up to three local professionals that line up with your criteria.
Another way to supplement your search is by checking out the National Association of Personal Financial Advisors (NAPFA). With this, you’ll type in your ZIP code and see a list of nearby professionals and firms. The only downside is that you have to check each one yourself to see if it fits the bill. Nevertheless, it’s an effective way to quickly find professionals in your region.
If you have questions about how an advisory firm or individual makes money, try looking up their Form ADV. This includes information about their fee structure, whether they earn commissions, and their AUM.
Frequently Asked Questions
Is a fixed-fee structure better than an AUM one?
Whether or not one is better largely depends on your needs and preferences. Flat fees can be cheaper than AUM models if you don’t foresee yourself needing long-term help. Because they don’t typically lead to more permanent relationships, fixed rates are also often better for people who want to control more of their portfolio independently.
But short-term guidance also means your advisor has less of an incentive to facilitate growth over time. As Lyons clarifies, “With AUM models, the fee typically increases as your portfolio grows,” giving an advisor “a direct incentive to increase the size of the portfolio (or keep it from decreasing) as their compensation is tied to the size of the portfolio.” However, he mentions that “this incentive is absent with flat fee models.” So, if you would rather work with someone who keeps a watchful eye over your portfolio, you may want to turn away from fixed costs.
Can flat advisory fees increase?
Even fees for financial advice aren’t immune to price hikes for a variety of reasons. A common one is inflation. As it costs more to hire employees and pay for software and office supplies, a firm may raise its rates. Another explanation is higher demand. If an advisor has grown their client base, their time will become far more valuable, sometimes leading to more expensive fees.
Can I reduce fixed financial advisor fees?
Negotiation is almost always an option; however, it could be difficult to convince an advisor or their organization to drop prices. You can also look for a note inside their Form ADV to see if they allow discounted prices.
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