Debunking 5 Myths About Flat Fee Financial Advisors

The Google search traffic for "flat fee financial advisors" is exploding. At last check, the year-over-year increase in users searching for that term has surged by 900%! It's easy to understand why too. The flat fee financial advice approach is straightforward, transparent, and typically much more cost effective for people with higher savings. 

However, the traditional financial advisory community fiercely protects its substantial profit margins, perpetuating several myths that prevent many from considering this model. Let's debunk some common misconceptions about flat fee financial advisors.

Myth 1: Flat Fee Financial Advisors are More Expensive

One common myth is that flat fee financial advisors cost more than financial advisors who charge the traditional percentage of assets. This myth may be true for some. 

For example, consider an investor whose account balance is $500,000. Under the typical percentage of assets model they would pay about 1%. This would work out to $5,000 in advisory fees. Under a flat fee model, the fee could be twice as much or more.  

However, things generally change once the account balances exceed $1 million. 

For instance, let's take an individual with $2.5 million. With a 1% fee, this would be $25,000 per year. In comparison, Carroll Advisory Group charges a flat fee of $10,300 in 2024. When you project these numbers over time, the difference is staggering. Over a 25-year period, the difference in raw fees would be nearly $430,000*. This significant saving is a testament to the financial benefits of the flat fee model. 

While $430,000 is a significant saving, the benefits of the flat fee model extend even further. Typically, if someone pays lower annual fees, the difference stays invested in their account. This means that the fee savings would also grow over time, boosting the overall account value. In this scenario, using a flat-fee financial advisor could increase the ending account balance by $1,034,997*. This long-term financial growth is a reason to be optimistic about your financial future when using a flat fee advisor.

So while using a flat-fee financial advisor can be more expensive for those with lower savings balances, it is generally much more cost-effective for those with higher balances.

If you'd like to see the difference for your own scenario, use our Flat Fee Financial Advisor Calculator. 

*All calculations above are based on the following assumptions: 25-year period, 7% average annual return, 4% annual distribution with a 2% annual COLA, 1% advisory fee vs. a flat fee of $10,300 with a 3% yearly increase.  

Myth 2: Flat Fee Financial Advisors Offer Lower Quality Service

Some believe that flat fee financial advisors offer inferior services compared to their traditional percentage-based counterparts. The entrenched advisory crowd often directly or indirectly suggests that "you get what you pay for" when hiring a financial advisor. This is far from the truth.

In my experience, most of my colleagues who offer their services on a flat fee basis have a strong focus on comprehensive planning. By disconnecting the fee from the investment portfolio, they shift the focus of client interactions from the typical 'portfolio review and market update' to more meaningful conversations about taxes, distribution strategies, Social Security, and other financial planning topics that are more controllable than the market. This approach ensures that clients receive personalized strategies that cater to their unique financial situations, making them feel secure and well-cared for.

The flat fee approach de-emphasizes that financial advisors possess a secret recipe for superior investment performance. It's not that flat fee financial advisors disregard investment performance – they certainly care, as it fuels the plan – but they understand that their contribution to the relationship extends beyond buying index funds for 1% and taking credit for market gains.

By adopting this more comprehensive approach, flat fee financial advisors focus on adding value in areas where they can truly make a difference. They spend more time crafting personalized financial strategies that encompass more than just investment choices. 

Ultimately, when searching for any financial advisor, you'll want to ask them about their service calendar. Some questions to ask them would include:

• How often will we be in contact? 
• How do you review my accounts? 
• When will you update my plan?
• Can I call or email anytime I need something? 

Ideally, a firm that values transparency will have a page on their website that clearly lists their service model. Bonus points if they provide an exhaustive list of FAQs. 

Myth 3: Flat Fee Financial Advice is a New and Unproven Model

While the flat fee model may seem novel, it has been around for many years.

Historically, the only access to investments was through a stockbroker, who would charge a commission for brokering a trade on your behalf. Then, the internet was born, and suddenly, individuals had access to online brokerages where they could open their accounts and purchase investments without the assistance of a broker. This shift caused a significant pivot in the brokerage industry. Stockbrokers were rebranded as financial advisors, and the percentage-of-assets fee model became the norm for ongoing advice and portfolio management.

Today, as consumers become more informed and demand greater transparency and fewer conflicts of interest, the flat fee model is gaining significant traction. This model is likely how advisory services will be offered in the future. Some firms will still adhere to the older percentage-of-assets model, much like some still charge commissions, but offering services on a flat fee basis is poised to become the standard.

Myth 4: Flat Fee Advisors Don't Have Conflicts of Interest

Some suggest hiring a flat fee financial advisor is the only way to get an advisory relationship without conflicts of interest. The simple truth is that all relationships have inherent conflicts of interest. Understanding where those conflicts exist enables you to navigate the relationships without being taken advantage of.

Let's review the three primary advisory models to understand the conflicts of interest:

Flat Fee (Least Conflicted)

Flat fee financial advisors are generally considered the least conflicted. Their compensation is not tied to the products they sell or the amount of assets they manage. However, there is still one significant conflict of interest: they don't get paid unless you become a client. For individuals who don't need ongoing assistance, hiring an advisor may be overkill.

Traditional Percentage-Based AUM Advisors (More Conflicted)

Advisors who charge a percentage of assets under management (AUM) occupy a middle ground in terms of potential conflicts. While their interests are somewhat aligned with clients' success, there are notable concerns:

• Disproportionate Compensation: Just because you work hard to earn and save more doesn't mean the advisor's workload increases proportionally. Their fee grows with your portfolio, even if the effort they put in does not. For example, managing a $5 million portfolio does not necessarily require more effort than managing a $2.5 million portfolio. So why does it cost twice as much?
• Gathering Assets: Since their management fees are tied to the amount they manage, there may be a motivation to increase this amount even if it's not the right move. This could involve prematurely rolling over retirement accounts, moving savings from your bank to their management, recommending selling real estate to invest in your account, or not pursuing charitable giving, among other strategies that impact their fees.
• Discouraging Withdrawals: An AUM advisor might discourage you from taking withdrawals from your accounts to avoid reducing their fees. These withdrawals could be to pay off debts, buy something you've always wanted, or even to get the level of income that you need to fully enjoy retirement.

Commission-Based (Most Conflicted)

Commission-based advisors face the highest level of conflicts of interest, as their income is directly tied to selling financial products. This model can lead to advice that prioritizes the advisor's earnings over the client's best interests.

When I first started as a financial advisor, earning commissions from product sales was my only option. I remember a veteran advisor giving me some "sage" advice on surviving my first few years without getting fired for lack of performance. He said, "There are three people you have to keep happy: the home office, your wife, and the client. But two out of three ain't bad." Unfortunately, that mindset is still pervasive in the commission-based advisory community.

When using a commission-based advisor, you have to constantly analyze recommendations and internally ask, "Is this good for me, or only good for the advisor?" I generally recommend that individuals steer clear of advisors who charge commissions. The risk of being sold a product you don't need is just too high.

So, while each advisor model has conflicts of interest, understanding the potential conflicts helps you make more informed decisions when choosing a financial advisor. 

Myth 5: Flat Fee Advisors Are Less Motivated to Grow Your Money

Those opposed to the flat fee financial advisory movement have perpetuated the myth that a performance-based fee structure, typically associated with a percentage of assets under management (AUM) advisor, is more motivating. This model often comes with the promise that "When we do better, you do better," suggesting a financial alignment between the advisor and the client.

Entrusting your financial future to the notion that an advisor is more motivated by a performance-based fee structure warrants scrutiny. Extensive research indicates that actively managed portfolios rarely sustain outperformance over benchmarks like the S&P 500, challenging the premise that higher fees for active management consistently lead to better returns.

Furthermore, the emphasis on performance-based incentives overlooks a crucial principle in financial advisory services: the fiduciary duty. Regardless of the compensation model—be it a flat fee or a percentage of assets—a fiduciary advisor is legally and ethically obligated to act in the best interests of their clients. This fiduciary commitment ensures that both flat fee advisors and asset-based advisors are bound to prioritize their client's financial well-being above their own financial gain.

Despite the compelling evidence and fiduciary standards, some advisors and their clients hold onto the belief that higher fees for performance-based incentives justify better market returns. It's important to recognize that the real value of a financial advisor extends beyond investment selection to include comprehensive financial planning, strategic advice, and navigating life's financial challenges—all under the umbrella of fiduciary care.

Understanding the facts about flat fee financial advisors can help you make a more informed decision about your financial planning needs. By debunking these myths, it's clear that flat fee advisors offer a viable, transparent, and client-focused alternative to traditional AUM-based or commission-based models.