Ask an Advisor: I'm Hiring an Advisor to Manage My $4-5 Million Estate. Should I Choose the $8k Flat Fee Over a $35k Asset-Based Fee?

I’m nearing retirement and I’m wrestling with hiring either a flat-fee or fee-only (AUM) advisor to help with retirement planning and ongoing investment advice for an estate worth between $4-5 million. There is a big cost difference between the two: the flat fee would be about $8,000 a year, while the fee-only advisor charges about $35,000. The flat fee is very enticing but I don’t know if I would receive the same service?

-Dave

For many investors, fees are among the most important criteria to consider when interviewing prospective advisors. On the surface, two advisors might seem quite similar, but their fees could differ materially. How could this be? As you astutely recognize, Dave, it often comes down to the level of services that each advisor provides.

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Flat-fee and fee-only (AUM) advisors sometimes have different service models, which can lead to a noticeable divergence in annual fees. We'll explore what these two fee structures mean, unpack some potential differences in service models between the two advisors, and offer suggestions on how to evaluate each advisor.

Flat-Fee vs. AUM Advisors

Flat fees and asset-based (or AUM) fees are two of the most common advisor compensation structures. As outlined in the question, when working with a flat-fee advisor, you pay a certain absolute dollar amount each year for the advisor's services – in this case, $8,000 per year. The dollar value of the fee does not fluctuate based on how much money the advisor manages for you. Payments might be made in installments or when certain milestones are reached. For example, a flat-fee advisor may have you pay 50% upfront and the rest after a financial plan has been delivered.

Fee-only advisors, on the other hand, charge a percentage fee based on assets under management (AUM). As a result, the actual dollar value of fees paid each year will depend on the value of your portfolio that’s managed by the advisor. So, the $35,000 fee that the advisor quoted you could be different next year depending on how your portfolio performs.

Because they are paid more when your assets grow (and vice versa) and do not receive commissions for selling investment products, fee-only advisors are considered to have relatively strong alignment of interests with their clients. However, this may also incentivize advisors to manage portfolios either too aggressively or too conservatively, depending on whether they prioritize fee growth or stability.

In a fee-only relationship, fees are often paid quarterly and are drawn directly from the portfolio balance. Fee-only advisors typically calculate the percentage fee using a tiered or scaled system – as assets under management increase, the percentage fee generally decreases. (And if you need help finding an advisor to work with, try SmartAsset’s free tool matching tool.)

Assessing the Service Models

While factors such as experience, credentials, firm size and brand can influence pricing, service delivery will likely serve as the primary difference between the two advisors under consideration. Let's walk through a few key areas within "service" to evaluate and some questions that you can ask yourself and the prospective advisors.

1. Scope of Services

Sometimes, advisors who charge a flat fee provide only a financial plan for you to follow. This means they might not manage your assets on a daily basis. If that is the case, how will you manage your investment accounts? Will the advisor outsource it? If so, what additional fees are associated with the engagement, and how will the advisor ensure the investment strategy is aligned with the plan they created?

If the advisor doesn’t outsource portfolio management, will you have the capacity, interest and capabilities necessary to do it on your own? Given how fees are structured with fee-only advisors, it’s likely that they will manage your investments directly. Still, it’s important to understand what those services entail and how the strategy aligns with your overall financial plan.

2. Degree of Customization

Managing estates and estate planning, as seem to be central to your situation, tend to be complex, with several generations to consider. While it’s not always the case, larger asset pools like yours can increase the complexity of services that are required to meet your needs. You will want to understand how well-equipped each advisor is to help you address the complexities unique to your situation.

A good question to ask is: "Can you describe how and when you make adjustments to our plan and portfolio (if directly managing your assets)?" Similarly: "What influences your decisions as an advisor and team when making these adjustments?" This will help inform you of how the team is structured and what drives their decision-making process.

3. Level of Touch

With any advisor, you will want to know often they’ll be meeting with you. How many sessions do you get with each advisor per year? What deliverables do they provide you with? How hands on with implementation are they?

In other words, do they provide a plan and leave you to implement each piece, or do they do most of the subsequent execution for you? At the high end of touch, do they effectively serve as an on-call, outsourced CFO? Who is the primary point of contact and how much support do they have behind the scenes? Lastly, ask yourself what level of accessibility you need and how much help you'll need with respect to implementation, considering the level of complexity and customization required to execute your plan.

Putting it All Together

When thinking about the differences in services, remember to keep them in the context of your goals for managing your estate. Are you seeking to protect and preserve the estate for transfer to the next generation, generate retirement income or fund philanthropic goals? It's possible that it's a combination of a few of these, but which advisor and fee structure would ultimately best advance these goals?

If you determine that the advisor with the higher fee provides the right services for your needs and goals, then the fees could be justified. (And if you want to expand your search for a financial advisor, SmartAsset’s free tool can match you with up to three fiduciary advisors.)

Next Steps

Ultimately, the choice comes down to your personal priorities, which of course include fees. While it's imperative to assess how well each each advisor's services align with your needs, it's equally important to consider various subjective factors that go into the decision. How did you feel when meeting with them? How would you compare the level of trust established with each advisor? What are their motivations and do they align with your goals? Finding the right fit both functionally and emotionally is vital since successful advisory relationships tend to be long-term in nature.

A useful practice to help gather your thoughts and make an unbiased choice is to list your priorities, assign weights to each, and score each item on a scale of 1 to 3 or 1 to 5. You might pick a tiebreaker if the weighted scores come out equal. This exercise could help you to remain objective and avoid making a decision that is motivated by the wrong factors.

Tips for Finding a Financial Advisor

• There's a lot that goes into finding a financial advisor. You'll want to work with someone who offers the specialized services you need, like education planning or alternative investment management, for example. You'll also want to find someone who clearly communicates how their fees work and how much you'll pay for their services. Also, look into the legal and regulatory history of the advisor and/or their firm. Disclosures on an advisor's record can be a significant red flag, but not always. To help you navigate this process, we've created a comprehensive guide for how to find and choose a financial advisor.

• Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.

Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you'd like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Jeremy is a financial advisor and head of business development at DBR & CO. He has been compensated for this article. Additional resources from the author can be found at dbroot.com.

Please note that Jeremy is not a participant in SmartAsset AMP, and he has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

Photo credit: ©iStock.com/fizkes, ©iStock.com/hobo_018

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