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[Prefer to listen? You can find a podcast version of this article here: E211: The Benefits of Working With a Flat Fee Financial Advisor]

Choosing to work with a financial advisor can be a great decision. There are so many benefits that come from getting professional help with your money.

With so many options out there, it's important to understand the different fee structures and how they can benefit you.

One option to consider is a flat fee financial advisor. We'll break down the benefits of choosing a flat fee financial advisor and why it might be the right choice for you.

A flat fee financial advisor charges a set fee for their services, regardless of the amount of assets they manage or the transactions they handle. This fee structure can offer several advantages over other types of financial advisors.

First, it provides transparency. With a flat fee, you know exactly what you're paying, without any hidden fees or surprises.

Second, a flat fee gives you peace of mind. Knowing that your financial advisor isn't receiving commissions on certain products or investments means they are more likely to act in your best interest. They have no incentive to recommend products that may not be suitable for you.

Additionally, it removes the conflict of interest that comes with percentage-based compensation (more on that later).

Before discussing the benefits of a flat fee financial advisor, it's important to note that the fee structure should (generally) not be the most important thing to look for. The most important thing to consider when choosing a financial advisor is finding someone who is qualified, competent, and who is a good match for the kind of help you need.

The financial space is full of arguments and debates over fee structures and most of it is just a distraction. Financial influencers (who are usually unlicensed) love to demonize certain fee models and speak in unrealistic absolutes.

So before getting caught up in the noise around fees and service models, be aware that there are excellent financial advisors that work in every fee model.

That said, I am biased toward the flat fee model because I think it is the most fair, flexible, and conflict-free way to deliver financial planning and investment management.

So let's dig into what makes the flat fee model so attractive.

Cost savings with a flat fee financial advisor

One of the key advantages of choosing a flat fee financial advisor is the potential for cost savings. Unlike other fee structures, where advisors may charge a percentage of the assets they manage, a flat fee remains the same regardless of the size of your portfolio.

This means that as your investments grow, you won't be paying more in fees. This can result in significant savings over time, especially for those with larger portfolios.

The percentage-based model is called "Assets Under Management" or AUM. A common fee for AUM is 1% of the balance of the portfolio. While this is often the starting percentage, it will often go down as the size of the portfolio reaches certain breakpoints. For example, once the portfolio balance reaches $500,000 the fee might go down to 0.8% and continue to decrease as the balance increases.

While the decreasing percentage is helpful and provides a nice price break, the overall fee does continue to increase.

Again, I want to stress that this is not "bad" – it's simply how it works.

A flat fee structure, however, does not increase as the portfolio increases in size. The fee remains consistent and predictable. Over time this can result in significant cost savings.

With AUM, there is potential for the fee to "drag" on the investment returns because it continues to be a significant percentage of the balance. With a flat fee, the drag is typically much smaller.

For example, let's use a $3 million portfolio as an example. Under the AUM model, if an advisor charges 1% on the balance, the annual fee would be $30,000. Even if the fee is discounted to 0.5% because of a breakpoint the fee would still be $15,000. And it would continue to grow as the balance of the portfolio increases.

Many flat fee financial advisors, however, charge an annual fee in the range of $5,000 - $10,000. And (aside from any inflation-based increases) this fee stays the same even as the portfolio grows.

As you can see, this can result in significant cost savings over time, which improves the returns you get from your investments.

Flat fee removes conflicts of interest

Another great benefit of working with a flat fee financial advisor is that it can remove the conflicts of interest that can be present in an AUM model.

Another disclaimer: my belief is that most financial advisors want to do the right thing for their clients. Just because a conflict of interest exists does not mean that it keeps an advisor from doing the right thing.

That said, the AUM model does create some bias that can't be ignored. Let's say that you receive an inheritance of $500,000 from a deceased relative. You ask your financial advisor what you should do with it. You are considering either investing it, buying a rental property, or possibly starting a new business.

A financial advisor who receives compensation under the AUM model would only make more money if you were to invest it. At 1%, they would make an additional $5,000 per year. If you were to buy a rental property or start a business, they would not receive any additional compensation.

However, under the flat fee model, the financial advisor receives no additional compensation for investing the money and therefore has no conflict of interest when it comes to making a recommendation.

Again, I want to stress that I believe that most advisors would make a recommendation that is in the best interest of the client regardless of the conflict of interest. But the conflict is still there.

Flat fee aligns with the service being provided

Another issue with the AUM model is that it puts all the emphasis on investment management. But this is only part of financial planning.

Financial planning includes investment management, estate planning, insurance planning, cash flow planning, tax planning, employee benefits consulting, career coaching, and a variety of other things.

When fees are tied to the size of a portfolio, it sends a message that this is the primary focus of the relationship.

A flat fee pricing model, however, acknowledges that investments are only part of the financial plan and that the advisor's compensation should not be tied to the size of the portfolio. It does not take more effort to manage $500,000 vs $3 million.

Flat fee is the best of all worlds

As you can tell, I'm biased towards the flat fee pricing model. It saves clients money, it removes conflicts of interest, and it aligns better with the service actually being provided.

It also is the most flexible for clients. It allows the option of paying directly via credit card or ACH or the fees can come directly from investments.

One of the most convenient aspects of the AUM model is that fees are debited directly from investment accounts. This is convenient for both the advisor and the client because it removes "friction" from the process and makes it easy to handle the logistics of fees.

Flat fee billing can be set up the same way. Advisory fees can be billed directly from investment accounts with no friction.

Is a flat fee financial advisor right for you?

Financial advisors are skilled professionals and are compensated accordingly. There is no "perfect" way to handle fees. However, the flat fee model can be the most cost-effective, transparent, and conflict-free way to pay for financial advisory services which is why it's being sought out more by consumers all the time.

If you're looking for a flat fee financial advisor, there are several directories you can use that will let you filter by fee model. However, the most prominent site is FlatFeeAdvisors.org.

If you are interested in getting help with financial planning and investment management and you want to keep costs under control while avoiding conflicts of interest, consider working with a flat fee financial advisor. It can be a great way to level up your money.