Why I chose to be an Advice Only Financial Planner
Often I get the question, “Why did you choose to be an Advice Only financial planner?” In this blog I’m going to explain what an advice only planner is, why it can be better for clients, and how it impacts the clients of my Northwest Missouri RIA firm.
But first, a little background.
Hello! I am Phillip Durbin.
As a financial advisor for young families in Missouri, my goal is to help regular people build a lasting financial legacy that they can pass onto the next generation. Please sign up for my newsletter if you’d like to receive monthly tips on this topic.
And also…
Here are some articles and blogs I’ve written on this, which you may wish to read.
Article: The Power of Starting Early. & Middle-Class Finance: How to fix the broken.
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 $20,000 of your money, and is then compensated with 3% of the $20,000, or $6,000. The problem is that it becomes very transactional. The advisor’s incentive to maximize their pay on one trade does not align with your goal of maximizing your wealth over the long term.
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 $1,000,00 with them and they charge 1%, they make $10,000 per year off you. Let’s say you are considering buying a home with a down payment of $500,000, a sizeable portion of your $1,000,000 portfolio. The advisor will see a 50% reduction in their fee. They, as a result, 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.
Working with an Advice Only Planner: how things go
Before we get any further, let’s define some terms. What is an advice only planner?
An Advice-Only Financial Planner:
- Does not manage assets
- Does not have discretion over client assets
- Does not manage AUM
- Does not take custody of client assets
- Does not charge a fee for managing assets
- Does not implement investment recommendations on the client’s behalf
- Provides financial planning services only
I chose to be an Advice Only planner because I believe the rendering of financial planning, not the implementation of it, is where the real value of a financial advisor lies.
“Great – but what about my portfolio?”, you may ask. “How are you going to make sure that my portfolio is invested correctly?” I do not take control of client assets or trade them. Instead, I provide my clients with an analysis of their risk tolerance and investment plan, and even specific tickers. I teach you how to make the trades, and will even screen share with you in order to help you implement my recommendations on your own.
My services are focused on managing your overall wealth, not just making stock trades and “setting it and forgetting it.” Being an advice only planner puts the emphasis on the overall plan, the strategy, the roadmap. It’s delivered through financial planning, retirement planning, tax planning, and working with your attorney or CPA to get it all done, not just making trades and stuffing your money into products.
I typically charge clients $3,200 for a Full Financial Plan to cover your entire financial life. You then get my help to implement that plan for 6 months. After that, you move to an Hourly model only charged when we meet. My typical customers move to Quarterly Hourly meetings starting at $150 per hour, unless something major happens in their life.
Although every fee model has its biases, I feel the fairest way to charge clients is a flat fee for wealth management services rendered. An Advice Only planner 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 (usually a year), many advice only planners 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’s no commissions.
No products.
No private REITs being sold, no insurance policies being sold for a commission.
There’s no AUM fee, no percentages.
Just one single, flat fee, made clear in dollars.
Period.
Isn’t that beautiful?
Why don’t more advisors do this?
You may have noticed there aren’t many advice only planners in Missouri. This is because in many cases, it presents challenges for the advisor. Higher transparency benefits the client, and some advisors would rather not have it that way.
For example, if you were to say, “I charge 1% of your assets,” very few people will actually do the math and figure out they are paying $10,000 a year to the advisor, if their portfolio is worth $1,000,000. 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. *If everyone had to write a check out of pocket to their financial advisor, this industry would look drastically different.*
What are the benefits to the client?
There are many advantages to the client, which is why I choose to become an advice only financial planner.
- An advice only planner 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 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 advice only planners 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.
- Putting the emphasis on planning, rather than products, shifts the focus of my work to you, not me or the market or the economy or how much you have in your portfolio. It puts your financial future back into the realm of what you can control. My work will be focused on creating a strategy that maximizes the things you have control over and the decisions you make, even the psychology and behaviors that dictate these outcomes. I felt that this approach to financial planning – putting it at the center of what I do rather than an “add on” or an afterthought – was better for my clients.
And there you go – there’s my take on why I am an Advice Only planner!
Thanks for reading!
-Phillip
Phillip Durbin is an Advice Only planner for young families in Missouri.
P.S.
I am a fee-only, advice only planner in Cameron, MO who help regular people build a lasting legacy. If you’d like to meet with me to discuss retiring in Missouri, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.
Disclaimer
Disclaimer: I do not, have not, and never will claim to be a professional writer. Please excuse any spelling and/or grammatical errors. All information provided is for educational purposes only and is not intended to be investment advice. The information being provided via hyperlinks may be from third-party websites and is strictly as a courtesy/convenience. When you link to any of the web sites provided here, you are leaving this website. I make no representation as to the completeness or accuracy of information provided on these websites. I am not a CPA or attorney and anything included in this article may not be interpreted as tax or legal advice.