At HCP Wealth Planning, we believe the fees you pay your advisor should only be based on the expertise and services you receive, not the size of your portfolio. We don't think it's fair that someone should pay an advisor higher fees, just because they have more money. Why is this? Because the little secret that many financial advisors don't want you to know is that it generally doesn't cost them any more time or require any more expertise to manage a $1,000,000 portfolio than it does a $100,000 portfolio. Just because someone has a larger portfolio, that doesn't automatically mean their financial planning needs are more complex. Unfortunately this type of pricing model, which is known as the Assets Under Management (AUM) model, is still the most popular fee method in the industry.
Advice-Only Financial Planning: Making Holistic Financial Advice Accessible To Everyone Including DIY Investors
What if you don't have a ton of assets saved up yet? What if all of your investments are tied up in your employer-sponsored retirement accounts? What if you simply prefer to manage your investments on your own, or use robo-advisors, or target date funds? If this describes you, the reality is that you may find it difficult to find an actual CFP® who is still willing to create a thorough financial plan that isn't watered down (unless they plan to try to sell you a product). None of that matters to us! Because we charge a simple, flat dollar fee, our compensation isn't impacted by how much you have to invest, so we would love the opportunity to help you "Map Your Wealth" and make the best possible financial decisions.
No Conflicts of Interest
One of the biggest issues with the traditional AUM model is that it creates many conflicts of interest when the advisor is delivering advice.
- Paying off debt: What happens if it's in your best interest to pay down debt such as student loans or paying down a mortgage? That means less money to invest and less money in your advisor's pocket. They have a financial incentive to recommend you do not pay off that debt.
- Real Estate Investing: What if it makes more sense for you to diversify some of your savings and create passive income by investing in real estate? Let's say for example you want to spend $200,000 on a rental property. That's $200,000 that could otherwise be in your investment portfolio which means your advisor could be making $2000 per year in fees from that money. Can you trust that advisor to be unbiased when helping you decide if that rental property is a good investment? The same applies if you are considering paying a lump sum to buy into a business.
- Inheritance: Over the course of the next couple of decades, the greatest generational wealth transfer will take place. Let's say you inherit an IRA worth $200,000 and it makes sense for your advisor to invest that for you. Should your advisor all of a sudden be paid $2000 more a year because you inherited this money, even though it will barely take them any more time to invest it? What if you inherit $500,000 or even $1,000,000? Should they all of a sudden be paid $5,000 or $10,000 more per year?
- Social Security: In many scenarios, it makes sense to delay receiving Social Security benefits until you are eligible for the max benefit at age 70. This can be true even if delaying SS means you have to draw down more of your investments in the mean time. In this instance, your financial advisor has a financial incentive to recommend you take SS as early as possible, to reduce the drawdown of your investments and therefore prevent their fees from decreasing.
- The Rollover Conversation: There are many scenarios where it could be in your best interest not to rollover your 401(k) or 403(b) after you stop working for your employer. But if the only way an AUM advisor is going to get paid is by managing those investments in an IRA, they have a financial incentive to convince you to rollover out of your 401k and into an IRA. An advice-only advisor can give you an unbiased recommendation on whether or not to rollover because they get paid the same amount no matter how much you invest with them. And if you are deciding between rolling over a lump sum pension or annuitizing it as monthly payments, which option do you think an AUM advisor prefers?
The Typical AUM Advisor Excuse:
They will tell you that with the AUM model, their fees actually decrease if your portfolio value decreases. So their interests are aligned with yours. Sure, over a short period of time, the markets may drop and your portfolio may decrease in value, so your advisor's fees temporarily decrease. But if you have a long term relationship with your advisor, odds are that over time, your portfolio value will increase and therefore your fees will increase. This is true even accounting for short term market corrections. In fact, after every single stock market correction in history, the market has gone on to reach all time highs.
The majority of clients who work with an AUM advisor could not tell you exactly how much in dollar terms they paid their advisor last quarter. This is because those fees are buried in account statements that you probably won't look at and it's unlikely that advisor is going to be proactive in explicitly telling you how much you paid. This is less likely to happen when you partner with an advice-only planner and see the transaction fees on your bank account statements every month.