Why I Left My Old Firm to be a Fee-Only Financial Planner
This is a two-part blog series detailing my fees. This post will cover why I left my old firm and switched to the fee-only model. The second post will cover the reasons why I charge based on income and net worth.
One of the things that fired me up about launching Script Financial was the prospect of running a fee-only firm. Why is this so important to me? It’s important because the fee-only model is best suited for financial planners who want to give their clients sound, unadulterated financial advice. Pricing that involves commissions or other kickbacks to sell products introduces conflicts of interest that just aren’t needed. There’s a better way.
Ask your advisor how they get paid and if they bumble around about the commissions they earn over here and the fees they receive over there, take pause! This advisor is probably a fee-based (or commission and fee) advisor that earns fees on money they manage AND commissions on mutual funds, insurance and/or annuity contracts they sell. I know this because I used to be a fee-based advisor and it was a question that I muddled through and, frankly, felt uncomfortable with. This was especially true after I discovered the fee-only model.
To be clear, fee-based advisors are NOT bad people and I have great relationships with many of my old coworkers. The majority of the time, these advisors will act in the best interest of the client. My question is this: why would you even want to put yourself in a situation where you could potentially put your own interests in front of the clients? What if money is tight or you really want to take the fam on that European vacation you’ve been promising? Doesn’t that bring temptation into the mix when there need not be? I decided to take those situations off the table and went the fee-only route. It’s a route I feel comfortable with because that is the way I would hire a financial planner if I was the consumer. And I think that’s a healthy thing to do…look at your business and operate how you would want to be treated. So I made the leap and I’m happy I did.
The problem is that the public is mostly unaware how advisors are compensated. I mean, I was in the industry for a year and a half before I actually understood what fee-only was! Most people believe that their advisor is working with their best interests in mind and that may not be the case. Most advisors operate under the suitability standard versus the fiduciary standard. Let’s put it another way. Say, I’m selling you a suit or a dress (depending on what you’re in the mood for that day). If I’m following the suitability standard that most advisors out in the world follow, I need only sell you a suit/dress that fits, not one that particularly looks good. I mean blue.. err… white might not even be in your color wheel!
But you want to look good, right? If I’m the suit or dress salesman following the fiduciary standard, I need to make sure that the suit/dress not only fits, but looks great on you too, which is in your best interest. It would look something like this:
So, becoming a fee-only advisor was a major catalyst to launch my own firm. But how would I charge clients aside from the fact that I wouldn’t accept commissions or kickbacks? Needless to say, I spent copious amounts of time determining how to charge client fees in order to a) truly help my clients meet their financial goals and b) build a sustainable firm, so I could be around for the long haul. I probably looked at 6 different variations of pricing. I made my pros and cons list and checked it twice. The research was diligent and tireless and it looked a lot like this:
What did I settle on? I chose a model that calculates the fee based on a client’s income and net worth. Quick side note: net worth is the number you get when you add up all the things you own (bank accounts, investments, property) and you subtract all the things you owe (student loans, credit cards, mortgage). This is your net worth or your personal balance sheet. However, in order to properly explain my model, I will often reference a pricing structure that is much more widely used in the industry, which is charging clients based on Assets Under Management (AUM). This is money in accounts, such as your traditional or Roth IRA or a brokerage (after-tax) investment account you set up to buy stocks and mutual funds. While this model proves useful for some (like older people who have investable assets), I believe it has a few shortcomings, mostly that many of my clients (and other GenX and GenY-ers) have yet to amass assets to manage. This does NOT mean that these clients do not need financial planning advice because most people do (heck, I need a financial planner because I need someone to be objective about my financial situation and hold me accountable to the goals I make!). Because of this fact, this demographic of people are often turned away and/or underserved. Check out my next post that will outline the 7 Reasons Why I Charge Based On Income and Net Worth.
The fee-only and income and net worth pricing model are what works for me and my firm, Script Financial. If you’re looking to hire a fee-only financial planner, you can find one by searching the National Association of Personal Financial Advisors (NAPFA) or the Fee-Only Network.
About Script Financial
Tim Baker, CFP®, is the founder of Script Financial, a fee-only firm based in Baltimore, MD that is dedicated to helping pharmacists and young professionals meet their financial goals. For more information on the services offered, contact Tim today.
