Flat Fees vs. The World
“Indeed it has been said that democracy is the worst form of government, except for all those other forms that have been tried from time to time.”
— Winston Churchill
The financial services industry does a remarkable job of hiding how it actually makes money. Commercial banks don’t like to discuss net interest margin. Asset managers keep their lucrative two-and-twenty structure under wraps. Brokers have to be dragged in front of Congress to confess their payment-for-order-flow sins. And high-frequency trading firms don’t talk about… well, anything. It’s not that these companies aren’t providing valuable services (newsflash: they are). It’s just that their compensation structures are mostly smoke and mirrors.
Unfortunately, financial advisors are playing the same game, making it very hard for the public to understand how much their services actually cost. Not only are there a dozen different pricing models out there, but the buzzwords aren’t exactly boosting comprehension levels. Breakpoints, load fees, production, sales charges, trails, AUM, fee-only, fee-based, fee-for-service, blah blah blah. If you don’t already speak the language of High Finance, it’s like watching Peaky Blinders on an airplane. But it doesn’t have to be that way.
Thankfully, there is a new and different model: Flat fee financial planning. Clients still get the same full-service financial and investment advice, but without the confusing charges. A flat fee, usually paid as a monthly subscription, does not fluctuate based on how the market is performing, how much insurance is sold, or how the portfolio is allocated. It is simple, transparent, and fair. And the best way for most 20- and 30-somethings to pay for financial advice. Why?
Flat fees give more people access to financial advice. Due to their pricing models, most advisors won’t take a meeting unless a prospective client has at least $500,000 of investable assets. Most people under 40 don’t have that kind of cash, which means they can’t get professional advice. Flat fees solve this problem.
Flat subscription fees are familiar. Young people already pay for most things on a monthly basis (internet, phone, mortgage, car, student loans, insurance, gym memberships, Netflix, etc.), adding another one is easy to understand. Plus, subscriptions are recurring (easy to track) and predictable (easy to plan for).
Flat fees limit conflicts of interest. A flat-fee advisor has no ulterior motive for shoveling client money into investments or pressuring them into the traditional work-retire-die path. And they’re definitely not incentivized to sell any investment or insurance products. The clients’ goals are priority numero uno.
Flat fees are the future. The people that need financial advice are getting younger and savvier. They want a high-impact level of service from an advisor that understand them. And they want all this at a price that makes sense. The demands are changing. Advisors will have to change, too.
Flat fee financial planning may be the best model for 80s and 90s babies, but no fee structure is perfect. An advisor’s pricing model is just one factor to consider when choosing who to work with. It’s far more important to find someone that is competent and ethical with no glaring conflicts of interest. An advisor who checks those boxes, even one that doesn’t use flat fees, is worth their weight in gold.
When looking for an advisor/planner/CFP®, find someone that speaks the same language. Someone trustworthy. Someone that is upfront and transparent about their compensation.
Don’t get trapped in the financial industry funhouse.
Devin Faddoul, CFP® is the founder of Adda Financial | Outsource your financial life. Focus on your real life.