Why I Chose to be a Flat Fee Financial Advisor
Often I get the question, “Why did you choose to be a flat fee financial advisor?”
So, I’d like to explain what a flat fee advisor is, why a fixed fee can be better for clients, and how it impacts the clients of my Dallas, TX based RIA firm.
But first, a little background.
Hello! I am Bryan Huhn.
As a financial advisor for mid-career professionals and pre-retirees, both here in Dallas, TX and across the country, my goal is to help high earners turn their paychecks into assets, and those assets into supplemental income that grows over time. So they can pursue more freedom, fulfillment, and impact in their lives.
Please sign up for my newsletter if you’d like to receive monthly tips on this topic.
And also…
Here are some newsletters I’ve written on this, which you may wish to read.
Investing for Peace of Mind and Long-Term Success
What is Enough? And Why Knowing is the Path to Financial Freedom
Now let’s get on with it!
Incentives matter!
Most financial advisors charge their clients either a commission or a percentage of the assets they manage.
A commission would go something like this. The advisor recommends you buy a certain mutual fund with $200k of your money, and is then compensated with 3% of the $200k, or $6k.
This becomes very transactional. The advisor is incentivized to maximize their pay, not necessarily recommend solutions that align with your goals. Because of this, they often sell you products you don’t need.
If an advisor charges an Assets Under Management, or “AUM”, fee, they are somewhat more aligned with your goals, but in certain situations there can be a serious misalignment.
If an advisor charges you an AUM fee, they are earning a percentage of your total assets. If you have $1M with them and they charge 1%, they make $10k per year off you. And to make matters worse, as the value of your portfolio goes up, so does their pay. Not because they’re doing anything more for you. Just because the stock market goes up over time.
So, let’s say you are considering buying a home with a down payment of $200k, a sizeable portion of your $1M portfolio. The advisor will see a 20% reduction in their fee. A reduction that will cost them more over time.
As a result, they may encourage you not to do so. They may cite high interest rates or ballooning housing prices as the reason you should hold off. They may create a financial analysis that makes you think you won’t have enough money to buy the home. When in fact, you might.
Not every AUM advisor operates this way, but incentives do matter and can compromise objectivity.
Charging a flat fee for financial advice: how it works
Although every fee model has its biases, we feel the fairest way to charge clients is a flat fee for clearly defined wealth management services rendered.
A flat fee financial advisor calculates the fee based upon the likely amount of time and resources required to serve the client. The fee is decided prior to services being rendered, and is stated clearly in a dollar amount in your contract.
Although the fee will not change over the course of any given contract period, many flat fee advisors reserve the right to adjust the fee upwards for inflation from one contract period to the next. This is left to their discretion; some do, and some don’t.
There are commissions
No products
No unnecessary private investments or insurance policies
There’s no AUM fee, no percentages
Just one single, flat fee. Made in clear dollars. Period.
Isn’t that beautiful?
Why don’t more advisors do this?
You may have noticed there aren’t many flat fee advisors in Dallas, TX (or really anywhere, for that matter). In many cases, this is because it presents more of a challenge for an advisor.
Higher transparency benefits the client, and some advisors would rather not have it that way.
For example, if I were to say, “I charge 1% of your assets,“ very few people will actually do the math and figure out what that means in actual dollars. And even fewer will apply that math into the future, to figure out how much they’ll likely pay over time.
On the other hand, if I say that I charge $1,250 per month, it’s much easier to comprehend. You might start comparing that fee to other expenses that you have. And it may seem really high!
This creates significant challenges for a flat fee financial advisor. They had better be really good at what they do. And be ready to justify those fees to potential clients.
Therefore, many advisors prefer the murkiness (the opposite of transparency) that comes with charging a percentage of your assets. But while it may be good for the financial advisor, it’s terrible for the client over time.
1% doesn’t seem like a lot at face value. But when you do the math, it really adds up over time. On $1M, your annual fee would be $10k. At $1.5M, it would be $15k. At $2M, it would be $20k. And at $2.5M, it would be $25k.
I could go on, but you get the point.
And considering that a well-diversified stock portfolio can be expected to go up by around 8-10% annually over time, you can expect a lot of compounding growth. This is good when it works in your favor, but not when it works against you, in the form of never-ending fee increases.
To make matters even more obscure, the fee is automatically debited out of the account at the custodian. This helps to muddy the waters even more, because the client is less likely to realize how much money they are paying if they don’t have to write a check each quarter.
What are the benefits of flat fee advice to the client?
There are many advantages to the client, which is why we chose to render financial advice on a fixed fee basis.
A flat fee advisor is a fiduciary. Fiduciaries do not charge commissions. They follow the highest standard of care in the industry and must provide advice objectively, always putting the client’s interest before their own. Read more about the fiduciary standard if you’d like to learn more.
In some, but not all, cases the flat fee can be considerably less than what an AUM fee or commission would amount to. Usually this is true in the case of larger portfolios (and it is generally not true for smaller portfolios). If you were paying 1% to an advisor managing $5,000,000 of your money, you’d pay $50,000 a year in AUM fees. Most flat fee advisors are not charging $50,000 a year for services.
It is better for the client to have clarity about what these services cost, given that financial advisor fees can be one of the household’s largest expenses. AUM or commissions can vary; a fixed fee is predictable and more manageable from a cash flow standpoint.
And there you go – there’s our take on why we are a flat fee financial advisor.
Thanks for reading!
P.S.
As you now know, we are a fee-only, flat fee advisor in Dallas, TX (and working with clients nationwide), who help high earning professionals turn their incomes into assets, and their assets into supplemental income that grows over time. So they can enjoy more freedom, fulfillment, and impact in their lives. If you’d like to meet to discuss your situation, how to create a financial plan, or any other topics related to your wealth, please contact us and select a time to meet.