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I am approaching retirement and struggling with hiring a flat-fee or fee-only (AUM) advisor to help with retirement planning and ongoing investment advice for an estate worth between $4 and 5 million. There is a big cost difference between the two: the flat rate would be about $8,000 per year, while the fee-only advisor charges about $35,000. The fixed rate is very attractive, but I don’t know if I would get the same service?
-Dave
For many investors, compensation is among the most important criteria to consider when interviewing potential advisors. At first glance, two advisors may seem quite similar, but their fees can differ significantly. How can this be? As you well know, Dave, it often comes down to the level of service each advisor provides.
Are you looking for someone who can help you plan your retirement or manage your portfolio? SmartAsset’s free tool allows you to connect with up to three fiduciary financial advisors.
Flat-fee and fee-only (AUM) advisors sometimes have different service models, which can lead to a noticeable difference in annual fees. We’ll explore what these two fee structures mean, highlight some potential differences in service models between the two advisors, and make suggestions on how to evaluate each advisor.
A financial advisor listens to a potential customer during a free consultation.
Fixed compensation and asset-based (or AUM) compensation are two of the most common compensation structures for advisors. As outlined 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 fluctuate 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 have you pay 50% up front and the rest after a financial plan is submitted.
Fee-only advisors, on the other hand, charge a percentage based on assets under management (AUM). As a result, the actual dollar value of the fees paid annually 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 get paid more as your assets grow (and vice versa) and don’t receive commissions for selling investment products, fee-only advisors are considered to have a relatively strong alignment of interests with their clients. However, this can also prompt advisors to manage portfolios too aggressively or too conservatively, depending on whether they prioritize rate 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 percentage compensation using a tiered or scaled system. As assets under management increase, the percentage fee generally decreases. (And if you need help finding an advisor to work with, try SmartAsset’s free tool matching tool.)
While factors such as experience, credentials, company size and brand can influence price, the service is likely to be the main difference between the two advisors in question. Let’s go through some key areas within “service” to evaluate and some questions to ask yourself and the prospective advisors.
Sometimes advisors who charge a flat fee only provide a financial plan for you to follow. This means that they may not manage your assets on a daily basis. If so, how will you manage your investment accounts? Will the consultant outsource it? If so, what additional costs are associated with the assignment, and how does the advisor ensure that the investment strategy is in line with the plan he has drawn up?
If the advisor does not outsource portfolio management, do you have the capacity, interest and capabilities necessary to do it yourself? Given the way fees are structured at fee-only advisors, it’s likely they will manage your investments directly. Still, it’s important to understand what these services entail and how the strategy fits into your overall financial plan.
Estate management and wealth planning, which may seem critical to your situation, are often complex and require multiple generations to be taken into account. While not always the case, larger asset pools like yours can increase the complexity of the services required to meet your needs. You will want to understand how well-equipped each advisor is to help you address the complexities unique to your situation.
A good question to ask is: “Can you describe how and when you make adjustments to our plan and portfolio (if you directly manage your assets)?” Likewise: “What influences your decisions as an advisor and team when making these adjustments?” This will help inform how the team is structured and what drives their decision-making process.
With each advisor, you want to know how often he or she will meet with you. How many sessions do you have per year with each advisor? What deliverables do they offer you? How hands-on are they with implementation?
In other words, do they provide a plan and leave it to you to execute each part, or do they do most of the subsequent execution for you? At the higher end of the line, are they functioning effectively as an on-call, outsourced CFO? Who is the primary point of contact and how much support do they receive behind the scenes? Finally, ask yourself what level of accessibility you need and how much help you need with implementation, taking into account the level of complexity and customization required to execute your plan.
When considering the differences in services, keep them in the context of your estate management goals. Do you want to protect and preserve the estate for transfer to the next generation, generate retirement income or fund philanthropic causes? It’s possible it’s a combination of some of these, but which advisor and compensation structure would ultimately best advance these goals?
If you determine that the advisor with the higher fee provides the right services for your needs and objectives, the fees may be justified. (And if you want to expand your search for a financial advisor, SmartAsset’s free tool can match you with up to three fiduciary advisors.)
A man speaks with a financial advisor during a virtual meeting.
Ultimately, the choice comes down to your personal priorities, which of course includes costs. While it is imperative to assess how each advisor’s services fit your needs, it is 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 built with each advisor? What are their motivations and do they align with your goals? Finding the right match, both functionally and emotionally, is critical, as successful consulting relationships are typically long-term in nature.
A useful exercise to organize your thoughts and make an unbiased choice is to list your priorities, assign weights to them, and rate each item on a scale of 1 to 3 or 1 to 5. You can choose a tiebreaker if the weighted scores match. straight out. This exercise can help you remain objective and avoid making a decision based on the wrong factors.
There is a lot to consider when finding a financial advisor. You want to work with someone who provides the specialized services you need, such as education planning or alternative investment management. You will also want to find someone who clearly communicates how their fees work and how much you will pay for their services. Also look at the legal and regulatory history of the advisor and/or their firm. Disclosures on an advisor’s file can be an important warning sign, but not always. To help you navigate this process, we’ve created a comprehensive guide on how to find and choose a financial advisor.
Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting 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, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions about personal finance topics. Do you have a question that you would 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 author resources can be found at dbroot.com.
Please note that Jeremy is not a participant in SmartAsset AMP, nor an employee of SmartAsset, and has been compensated for this article.Some reader-submitted questions have been edited for clarity or brevity.
The post Ask an Advisor: I’m Hiring an Advisor to Manage My $4-5 Million Estate. Should I choose the fixed compensation of €8,000 over an asset-based compensation of €35,000? first appeared on SmartReads by SmartAsset.
