The Wall Street Journal Is Talking About Flat-Fee Advice. Let’s Clarify What That Means.

Thank you to Molly Grace and Buy Side from The Wall Street Journal for bringing more attention to flat-fee financial advice.

The recent article, “3 of the Top Flat-Fee Financial Advisor Companies,” introduces readers to an important idea: people do not have to pay a financial advisor a percentage of their investments every year.

That message deserves a much larger audience.

Unfortunately, the article also demonstrates why consumers need to look carefully at what the term, “flat-fee advisor,” actually means. Within the article, at least two very different business models are placed under that label.

Two Very Different Types of Flat-Fee Advice

The first model is a firm that will prepare a financial plan for a fixed project fee but will charge a percentage of assets if the client also wants ongoing investment management.

The second is a firm that provides ongoing financial planning and investment management for a fixed dollar fee that is not tied to the size of the client’s portfolio.

Those are not the same thing.

Of the three companies highlighted in the article, only Facet is described as a “true full-service flat-fee advisory firm,” providing financial planning and investment management for a stated annual fee.

The other two firms offer stand-alone financial planning for a flat fee, but their investment-management services remain priced under the traditional assets-under-management, or AUM, model.

Beacon Pointe charges between 0.50% and 1.50% of assets annually for investment management, while Allworth Financial charges as much as 1.85%.

Those firms may provide excellent advice. This is not a criticism of their services or their advisors.

It is, however, an important pricing distinction.

Why the Pricing Model Matters

Suppose an advisor charges 1% of assets annually.

A client with a $1 million portfolio pays approximately $10,000 in the first year. A client receiving similar services with a $3 million portfolio pays approximately $30,000.

As the portfolio grows, the dollar fee grows, even if the advisor’s workload, the complexity of the financial plan and the level of service do not grow proportionately.

Even under a tiered or graduated fee schedule, clients paying under the AUM model generally pay more as their portfolios increase in value.

A flat project fee for a financial plan may be useful, but it does not change that dynamic if the ongoing investment relationship is still billed as a percentage of assets.

This is why I believe the emerging category of fully flat-fee advice deserves its own recognition.

The Growth of Fully Flat-Fee Advice

Across the country, smaller independent advisory firms are providing both comprehensive financial planning and ongoing investment management for a clearly stated dollar fee.

That fee may reflect the complexity of the household, the services required, and the advisor’s expertise, but it does not automatically rise because the market went up or because the client saved and invested more money.

That was the idea behind FlatFeeAdvisors.org.

I started the site in 2021 as a simple directory intended to help consumers find fiduciary financial advisors who provide investment management for a fixed fee rather than a percentage of the assets they manage.

My partners, Michael Reynolds and Chris Randall, have since helped develop it into a more comprehensive resource for both consumers and financial advisors who want to learn more about flat-fee advice.

The directory is specifically intended to help consumers find advisors offering the second model: ongoing financial planning and investment management for a fixed fee.

It does not include firms that offer a one-time financial plan for a flat price while continuing to charge AUM fees for ongoing investment management.

Happily, the flat-fee category appears to be gaining even more momentum.

Other directories and advisor-matching services have emerged, including some with very similar names. The appearance of competing sites is another sign that, “flat fee,” is becoming a recognizable consumer category rather than a niche pricing experiment.

That is good news.

More awareness, more advisors and more competition should make it easier for consumers to understand their choices.

Flat Fee Is Not Automatically Better for Everyone

The point is not that flat-fee advice is automatically right for every consumer.

It is also not that every AUM advisor is overpriced, conflicted or providing poor service.

For some households, particularly those with relatively small portfolios, an AUM arrangement may initially cost less than a comprehensive flat-fee engagement. Different clients also value different service models, and the appropriate arrangement will depend on the advice and support they need.

The important thing is that consumers understand exactly what they are purchasing and how their advisor is being paid.

Questions to Ask a Flat-Fee Advisor

When interviewing an advisor who describes the firm as, “flat fee,” consider asking:

• Does the flat fee cover only the creation of a financial plan?

• Does it include ongoing financial planning?

• Does it include ongoing investment management?

• Will the fee increase simply because my portfolio increases?

• Could I continue receiving advice if some of my assets are held in a 401(k), used to purchase real estate, donated to charity or spent to support my life?

Those questions get closer to the real issue than the label alone.

Flat-Fee Advice Is Moving Into the Mainstream

So, sincerely, thank you to Molly Grace and Buy Side for advancing the discussion.

The fact that The Wall Street Journal is devoting attention to flat-fee financial advice is another indication that the model is moving into the mainstream.