Flat Fee Planning — A different approach
When I was exploring entering financial planning back in 2012, I knew right off the bat that I was not going to even entertain any companies that “sold products”, rather I wanted to work with a company that sold their expertise and service. This led me to find and devour all the information available on NAPFA, which is an organization that supports fee-only financial planning. I knew fee-only planning was going to be the path forward for me. It really resonated with me how as a fee-only planner, I was able to sit on the same side of the table as my clients. When I made my move, the firm I began working for charged a fee on Assets Under Management (AUM). This approach does a pretty good job of aligning incentives between the planner and their clients. For example, the fee arrangement incentives long-term relationships, therefore the planner does not have a desire to take too much investment risk on behalf of their client. At the same time, the planner needs to provide sufficient returns in their portfolio management to justify their fee. I was very comfortable with this fee arrangement, and still remain comfortable with it for certain situations.
As I was dreaming about starting my own firm, I continued to deeply analyze all the different ways in which planners charge their clients fees. While AUM remains the dominant approach, I began to see Net Worth based fees and Flat Fees as potentially a better approach, depending on the client profile and their needs. After evaluating both of these approaches, I decided to move forward with Flat Fees, for a number of reasons I wanted to share here.
The biggest reason I decided that flat fees would be the preferred approach for my new planning firm was based on my target clients. One of my primary focuses is working with real estate investors. If the way in which I get compensated as a financial planner is through assets under management, I would not be able to really say that I am on the same side of the table as a real estate investor, since I would have financial incentive to recommend to them the sale of their real estate. However, a flat fee fits extremely well for real estate investors, since they know if I recommend for them to sell a property, or not purchase a different property it isn’t because I will be paid to manage the extra capital they have.
Another reason I decided on a flat fee structure is because of the incredibly high cost of working with traditional investment advisory and financial planning companies. For example, if a retiree has $2 million they would like for an advisor to manage for them, a typical fee might be 1% on up to the first $2 million. This means that someone could end up paying $20,000 per year for investment management and financial advice. To put this in perspective, many retirees I know with a nest egg of $2 million probably spend somewhere around $60,000 - $80,000 per year, excluding advisory fees. That means this fee is anywhere from 25-33% of the amount they would normally spend for the entire year! Not only does this fee affect the savings of a retiree in a single year, but compounding this over 10 years, it adds up to be a tremendous amount of money. I have included an illustration below that shows over the course of 10 years, a 1% annual fee ends up costing a retiree a total of $335,705 in fees. In comparison, a fixed fee of $6,000 per year would cost a retiree a total of $66,000. This is a difference of $269,705.
Now, the last graph showed total advisory fees paid over 10 years, however, compounded returns are incredibly important for retirees. We spend our lifetimes accumulating and growing personal savings and much of that is through compounded returns. The extra $269,705 in fees paid over 10 years also misses out on the compounding the market provides. Therefore, the ending capital balances in each of the two portfolios is markedly different. In our same example, a 1% annual fee results in an ending capital balance of $4,624,589. Whereas, a $6,000 annual fee results in an ending balance of $5,051,467. We already determined that $269,705 of that is from extra fees, however, there is an extra $157,173 of missed earnings from those extra fees. The bottom line is that Fees Matter!
The goal of RE|Focus FP is not to be the lowest cost provider and as a result return poor service to their clients. Instead, we really believe in close personal advisory relationships and are very focused on providing comprehensive planning and investment advice to a small group of clients. Where other larger companies have huge staff and back offices to maintain and pay, RE|Focus leverages appropriate technology to ensure that all clients are receiving the highest quality advice and the personal touch that is so important when dealing with finances.
When evaluating the founding of RE|Focus there were a few non-negotiable principles that are extremely important and flat fees are key to all of them. First, is transparency. It is my opinion that clients should know exactly what they will pay in terms of fees at the beginning of each year. With Asset-based fees, their annual fee could go up or down during the year, depending on the performance of their portfolio. Second, just keep it simple. With variable fees, it is necessary to calculate the fee quarterly based on the average daily balance of the account, or using some other method. Just keep it simple. Lastly, I don’t want any conflicts of interest. We can recommend selling or buying a business, real estate or a private investment without conflict about what happens to the advisory fee. RE|Focus seeks to go above and beyond minimum requirements for Fiduciary standards when engaging with clients. If this resonates with you, I would encourage you to reach out to see if RE|Focus might be a good fit for you.
*** Illustrations based on start date 1/1/10, VTSAX - 42%, VTMGX - 18%, VBTLX - 40%. Portfolio rebalanced quarterly, with fees withdrawn on quarter-end date. Includes reinvestment of dividends and capital gains. Visuals for illustrative purposes only. Past performance is not indicative of future results. Results may be higher or lower than represented in illustrations.
About Daniel:
Daniel is a real estate investor, small business owner, AirBnB operator and trusted financial planner. I started RE|Focus Financial Planning, a boutique planning firm focused on working with real estate investors and retirees. As a CERTIFIED FINANCIAL PLANNER™ professional, I help successful individuals and families gain clarity on their current situation and future goals. If that sounds like you, let’s have an introductory conversation to learn more.
