Flat-Liners: Understanding Advisor Fees
Fee-only financial advisors generally have two models for being paid; an ‘AUM’ (Assets Under Management) model and a flat monthly, quarterly or annual fee. If you read any LinkedIn posts or visit the websites of flat-fee advisors, you’ll generally come across commentary that the AUM model is disadvantageous to clients as the advisor’s fee compounds against them over time. There may be statements alluding to the same amount of work for the advisor for a higher price as your portfolio grows.
While these claims do have some truth to them, here’s the part they do not mention: a flat fee structure only benefits those with high portfolio balances. Let’s use a simple example to demonstrate when a flat fee would benefit a client more than an AUM calculation.
Assume we have two different advisors, one charges 1% of AUM and another charges $5,000 per year regardless of the account size. It’s worth noting that most securities state administrators and the SEC will not allow for excessive fees as a percentage of assets (generally over 2%) so this is purely for illustrative purposes only. To keep the math simple, we assume in the AUM model that the account stays flat, fees are assessed annually, and the fee is the same across account sizes. These assumptions are rarely the case.
Even so, the results show as follows:
Note: Most advisors, including EVCM, charges a lower percentage for higher balances
In this example, a potential client would need over half a million dollars in investable assets for the flat fee structure to be cheaper, a hefty some for a large majority of the population. Assuming regulatory agencies don’t allow for effective annual fees above 2%, a client would need a quarter million just to work with the flat fee advisor! This assumes the advisor doesn’t have a higher minimum to open an account with them.
On a more qualitative note, can a person assume an advisor will pay equal attention to a client’s account if they know they’ll be paid the same fee no matter what happens? Can this advisor truly fulfill their fiduciary responsibilities and be aligned with the client’s best interests?
Much of the financial services industry only prioritizes advice and portfolio management services for those that have already ‘arrived’ and ignoring those who can likely benefit from financial services the most. Many advisors, both from large institutions and independent firms, only work with affluent clientele in order to earn more fees in total, especially flat fee advisors. This has led to a cultural belief that those with smaller sums do not deserve or cannot benefit from working with a financial advisor.
EV Capital Management was founded to change this cultural belief. We believe that everyone can and should benefit from quality financial services. We have low account minimums that most people can meet and reasonable AUM fees to ensure your portfolio can maximize its value. Even if you do not have investable assets (yet), we charge low monthly and hourly fees for financial consulting to have your questions answered and needs met.
If you’re tired of being ignored by your current financial institution, schedule a call with us today to begin your financial wellness journey.