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I am nearing retirement and struggling to hire a flat fee or fee only (AUM) advisor to assist with retirement planning and ongoing investment advice for a property of 4 and 5 million dollars. There is a big difference in cost between the two: the flat fee would be about $8,000 per year, while the advisor only charges about $35,000. The flat rate is very attractive, but I don’t know if I would get the same service?
-Dave
For many investors, fees are among the most important criteria to consider when interviewing potential advisors. At first glance, two advisors may seem quite similar, but their fees could differ materially. How could that be? As you astutely acknowledge, Dave, it often comes down to the level of services each advisor provides.
Looking for someone to help you plan for retirement or manage your portfolio? SmartAsset’s free tool can match you with a maximum of three fiduciary financial advisors.
Flat Fee and Fee Only (AUM) Advisors. sometimes they have different service models, which can lead to a noticeable divergence in annual fees. We’ll explore what these two fee structures mean, uncover some potential differences in service models between the two advisors, and offer suggestions on how to evaluate each advisor.
A financial advisor listens to a potential client during a free consultation.
Flat fees and asset-based (or AUM) fees are two of the most common advisor compensation structures. As described in the question, when you work with a flat-fee advisor, you pay a certain absolute dollar amount each year for the advisor’s services, in this case, $8,000 per year. The dollar value of the fee does not vary based on how much money the advisor manages for you. Payments can be made in installments or when certain milestones are reached. For example, a flat fee advisor may ask you to pay 50% up front and the rest after a financial plan has been delivered.
Paid advisors onlyinstead, they charge a percentage fee based on assets under management (AUM). As a result, the actual dollar value of the fees paid each year will depend on the value of your portfolio managed by the advisor. So the $35,000 fee the advisor quoted you could be different next year depending on how your portfolio performs.
Because they pay more when your assets grow (and vice versa) and they don’t commissions to sell investment products, fee-only advisors are considered to have a relatively strong alignment of interests with their clients. However, this can also incentivize advisors to manage portfolios too aggressively or too conservatively, depending on whether they prioritize fee growth or stability.
In a fee-only relationship, fees are often paid quarterly and taken directly from the portfolio balance. Fee-only advisors typically calculate the fee percentage using a staggered or scaled system – as assets under management increase, the percentage share generally decreases. (And if you need help finding an advisor to work with, try this SmartAsset’s free tool combination tool.)
While factors such as experience, credentials, firm size, and branding can influence pricing, service delivery will likely serve as the primary difference between the two advisors under consideration. Let’s go through some key areas within ‘service’ to assess and some questions to ask yourself and potential advisors.
Sometimes advisors who charge a flat fee just provide a financial plan to follow. This means they may not manage your assets on a daily basis. If so, how will you manage your investment accounts? Will the advisor outsource it? If so, what additional fees are associated with the commitment and how will the advisor ensure that the investment strategy is aligned with the plan they created?
If the advisor does not outsource portfolio management, will you have the ability, interest and capabilities to do it yourself? Given how fees are structured with fee-only advisors, they likely manage your investments directly. Still, it’s important to understand what these services entail and how the strategy aligns with your overall financial plan.
Estate management i real estate planningas central as they appear to be to your situation, they tend to be complex, with multiple generations to consider. While this is not always the case, larger asset pools like yours can increase the complexity of the services required to meet your needs. You want to understand how well equipped each advisor is to help you address the unique complexities of your situation.
A good question to ask is, “Can you describe how and when you make adjustments to our plan and portfolio (if you manage your assets directly)?” Similarly, “What influences your decisions as an advisor and team when making these adjustments?” This will help inform you of how the team is structured and what drives their decision-making process.
With any advisor, you’ll want to know often that they’ll be meeting with you. How many sessions do you get with each advisor per year? What deliveries do you provide? How practical are they with implementation?
In other words, do they provide a blueprint and let you implement each piece, or do they do most of the back-end execution for you? At the top end of the contact, do they serve effectively as an on-call and outsourced CFO? Who is the main point of contact and how much support do they have behind the scenes? Finally, ask yourself what level of accessibility you need and how much help you’ll need with implementation, given the level of complexity and customization needed to execute your plan.
When thinking about service differences, remember to keep them in the context of your goals for managing your wealth. Are you looking to protect and preserve property for transfer to the next generation, generate retirement income or fund philanthropic goals? It may be a combination of some of these, but which advisor and fee structure would best advance these goals?
If you determine that the advisor with the highest fee offers the right services for your needs and goals, then the fees may be justified. (And if you want to expand your financial advisor search, SmartAsset’s free tool can engage with up to three fiduciary advisors.)
A man talks to a financial advisor during a virtual meeting.
Ultimately, the choice comes down to your personal priorities, which of course include fees. While it’s imperative to evaluate how well each advisor’s services align with your needs, it’s equally important to consider several subjective factors that go into the decision. How did you feel when you met them? How would you compare the level of trust established with each advisor? What are their motivations and do they align with your goals? Finding the right fit both functionally and emotionally is vital, as successful counseling relationships are often long-term in nature.
A useful practice to help you gather your thoughts and make an unbiased choice is to list your priorities, assign weights to each, and rate each item on a scale of 1 to 3 or 1 to 5. You can choose a tiebreaker if the weighted scores arrive. out the same This exercise can help you stay objective and avoid making a decision based on the wrong factors.
There is a lot that goes into finding a financial advisor. You want to work with someone who offers the specialized services you need, such as educational planning or alternative investment management, for example. You’ll also want to find someone who clearly communicates how their rates work and how much will you pay for their services. Also, check the legal and regulatory history of the advisor and/or their company. disclosures on an advisor’s record can be a major red flag, but not always. To help you navigate this process, we’ve created a comprehensive guide to how to find and choose a financial advisor.
Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with verified financial advisors serving your area, and you can make a free introductory call with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of major fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers readers’ questions about personal finance topics. Have a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Jeremy is a Financial Advisor and Head of Business Development at DBR & CO. Additional resources from the author can be found at dbroot.com.
Note that Jeremy is not participating SmartAsset AMPnor is he an employee of SmartAsset, and has been compensated for this article.Some questions submitted by readers are edited for clarity or brevity.
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