Flat-fee financial planning is growing in popularity, and for good reason. This article shows why flat-fee financial advisors can be a great fit for retirees.

Hiring the right type of financial advisor to help you plan your retirement can be a daunting task. We get it, it’s difficult, the stakes are high and there is a lot of conflicting information out there. It can be difficult to figure out how much a consultation with a financial advisor will even cost, regardless of how you are paying them.

It is important that, however your advisor is getting paid, your goals align with theirs. As you’ll see below, we believe that the flat fee model is simpler, more transparent, and often results in the least conflict of interest compared to other service models.

If you are thinking of hiring an advisor to help you plan your retirement, take the time to learn about how different advisors get paid, and what exactly you want your advisor to do for you. There are lots of different models out there, it’s important you find the best for you. We have compared three of the more popular service models below.

The Commission-Based Model

Many advisors work under the commission model. It is important to note that just because this model may not be the best for you, it does not mean that advisors working this way are unethical. All advisors must agree to follow a high set of ethical standards, and all indications are that for the most part, the vast majority of them do. Still, it is worth digging a little deeper into this model.

Most commission-based advisors are salespeople selling a few select products for a certain company. Let’s say an advisor is contracted with an insurance company, then their role is to go out into the marketplace, meet as many people as they can, ask enough questions and eventually they will find someone who can benefit from what they are selling. Maybe it’s life insurance, disability insurance, or something like that.

The problem is, they are starting with the product, and then trying to find someone who needs it. Certainly, it will be the perfect solution for some people, but it may not be quite right for everyone, and all too often, a well meaning salesperson might try to force it to work like fitting a square peg into a round hole. It kind of works, and while it may be better for their customer than doing nothing, it is by no means the perfect solution.

The Assets Under Management Model (AUM)

Many advisors charge a fee according to assets under management (AUM). At first glance this seems like a better solution. After all, if the portfolio value goes up, the fee goes up with it, so the advisor will do everything they can to increase portfolio value.

Dig in a little deeper and soon some problems arise. For example, let’s say a retiree client has a 401k from their old employer, the advisor only gets paid if that account gets rolled over into an IRA under the advisor’s control. Is it always in the client’s best interest to do so? Hardly. Or maybe the client wants to know if they have enough money to purchase a vacation home. Purchasing the home will vastly lower the assets under management, thus the advisor gets a pay cut every time a client wants to splurge on themselves during retirement.

Another issue with the assets under management model is that the fee charged is often unrelated to the service cost.  For example, it typically doesn’t cost more to manage a $2 million portfolio than a $1 million portfolio, so why should someone with $2 million pay twice as much as someone with $1 million?

Again, it does not mean that they are acting unethically, but their goals will not always be aligned with their clients’ goals, and it’s easy to see how problems can arise from that type of a model.

The Flat Fee Model

A flat fee financial advisor charges a set flat fee for financial planning and investment management. They do not receive commissions or AUM fees. The flat fee model aims to connect the client’s fee with the service provided instead of charging an arbitrary percentage. This often leads to greater transparency, better service, and lower fees.

Many clients of flat fee advisors are looking for a comprehensive, long-term relationship, while others may need only a one-time visit. Some flat fee advisors offer both an ongoing financial planning and investment management service and a one-time plan service.

For clients that need help planning their retirement but want to manage their own money, meeting with a flat fee advisor for a one time financial plan can be beneficial. For example, if a client’s main retirement savings is in a company sponsored 401k, there isn’t a way for a commission or AUM advisor to get paid, so they will likely not be able to help that client.

Some other clients may need advice on a distribution strategy. While they may be savvy enough to manage their own portfolio, a one-time plan can be beneficial to discuss a tax efficient retirement distribution strategy. Which assets to liquidate and when is one of the more important and complex decisions to make, and while a discussion is warranted, it isn’t necessary to put all of your assets under the advisor’s control. A flat fee model can provide for this type of relationship.

Some other services that a flat fee financial advisor often provides to their clients are advice and guidance around Roth conversions, Social Security timing and tax efficiency. Roth conversions can be an extremely effective tool to help lower the tax burden in retirement. Paying Uncle Sam is usually the biggest single expense for a retiree, and strategic use of a Roth conversion can potentially save thousands of dollars. The rules around conversion can get quite complex though, and the penalties from the IRS and the tax impact for making a mistake can be severe. Having a discussion with a professional can be valuable and give a client tremendous peace of mind.

When to start taking Social Security is another way that a flat fee advisor can help. It is a big decision, the math and other factors can be complex, and often getting clear information from the government can be a challenge.

Creating a tax-efficient portfolio can stretch a retiree’s savings much further, and discussion about topics such as low-cost index funds, real estate, municipal bonds and required minimum distributions can be of great value.

Summary

While there are no perfect fee models, a flat fee model is often the best for a retiree that wants financial planning and investment management because it often provides a similar or better service, at a lower cost, with less conflicts of interest.

If you need help planning your retirement, you can visit my website to learn more or to schedule a free 30 minute learn-more call.