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 Princeton, New Jersey RIA firm.
But first, a little background.
Hello! I am Michael Hart.
As a financial advisor for mid-career professionals in Princeton, New Jersey, my goal is to help young professionals build wealth. Please follow me on LinkedIn if you’d like to receive monthly tips on this topic.
And also…
Here are some blogs we’ve written on this, which you may wish to read.
Is a Roth Conversion really necessary?
How retirement benefits are taxed
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 a 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.
Our 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 intro products.
We charge clients a flat, one-time fee for this service.
Although every fee model has its biases, we 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 New Jersey. This is because in many cases, it presents challenge 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.
What are the benefits to the client?
There are many advantages to the client, which is why we chose 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 our 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. Our 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. We felt that this approach to financial planning - putting it at the center of what we do rather than an “add on” or an afterthought - was better for our clients.
And there you go – there’s our take on why we are an advice only planner!
If you're searching for a:
Fee-only advisor in Princeton, New Jersey
Flat-fee planner near Princeton, NJ
Retirement planner in Princeton NJ
Fiduciary financial advisor in Mercer County
Advice-only financial planner in Princeton, NJ
…I’d be happy to help.
Thanks for reading!
— Michael
Michael Hart, CFP® is an advice only financial planner for mid-career professionals in Princeton, New Jersey.
We are fee-only, advice only planners in New Jersey. If you’d like to meet with us to discuss retiring in central New Jersey, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.
Disclaimer
Investment advisory services are offered through Advice Only, Public Benefit Corporation, DBA Open Book Financial Planning, a Registered Investment Advisor in the State of CA and in other jurisdictions where registered or exempted (CRD# 334039). This communication is not intended as an offer or solicitation of any financial instrument or investment advisory services. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request and at www.adviceonly.com
