One simple, transparent fee for both financial planning and investment management

In recent years, there has been a growing trend in the business of financial advice to shift away from conflict-ridden commissions for the sale of financial products. Most of the industry, however, is still incentivized to push consumers towards expensive investment or insurance products regardless of whether or not it is actually in their best interest. 

We will never give you a financial recommendation because we benefit from you following it!

Unlike some financial advisors who technically only have a fiduciary responsibility for certain parts of their relationship with you, we will ALWAYS act in your best interest. No financial advisor works for free, if you are not paying them then you should question who is and how they are incentivized. 

Some financial advisors follow a more objective model called being “fee-only”, where the client pays their advisor directly in order to remove such conflicts. Among that group, most charge fees on the basis of their account size. This is often referred to as an “Assets Under Management” (or “AUM”) model, and we believe this change to be a tremendous step in the right direction because brokers no longer have a financial incentive to churn client accounts or sell inappropriate products for high commissions.

The amount of this fee can vary from one company to another, but typically averages about 1% of the account per year for investment management services. A growing number of firms will also provide financial planning as part of that fee, another positive change. 

Why we don’t do AUM fees

Next Gen Financial Planning firmly believes that despite the growing popularity of the AUM model and its important advantages over commissions, it is still riddled with conflicts of interest while also preventing clients from receiving the enormous benefits of economies of scale that now exist. Moreover, it does not make sense that the value of a client’s portfolio should determine the fees paid for financial planning services.

AUM fees do not really incentivize financial advisors to grow accounts; they incentivize them to gather more assets. It does not cost a firm twice as much to manage a $2 million portfolio as it does to manage a $1 million dollar portfolio, and the service provided does not change much, so why should the client pay twice as much? If the market goes up 10% and you are invested in index funds that also go up 10%, do you think it is fair to pay your advisor 10% more even though he didn’t do any additional work?

If you ask your AUM-compensated advisor about whether or not you should spend some of the money in your investment account to pay off your mortgage or start a business, do you trust them to give you objective advice knowing that managing a smaller account would reduce their fees? Do you trust their recommendation to roll over your old 401(k) into an account that they manage, or to take the lump-sum option on your pension? What if they put you into investments that are higher risk than you would prefer, in order to grow your account size and their fees? 

There are many financial advisors out there who absolutely abide by their fiduciary oaths to always put the client first. Unfortunately, the temptation to increase revenue will always be enough to tempt some portion of them to put that aside, making AUM fees a flawed model.

Hourly fees

Another common approach among fee-only financial planners is to charge by the hour for their services, similarly to other professionals like attorneys or accountants. There are quite a few advantages to this model, including that the fee paid is directly correlated with the actual amount of work done. However, we believe hourly fees to be more appropriate for projects with a limited scope and duration. 

At Next Gen Financial Planning, we want to create long-term relationships with clients and serve them over the long haul. We do on occasion complete limited projects for clients at an hourly rate of $150, but don’t see this model as being ideal for continuous service implementing the recommended steps in your financial plan and making updates as things change. And any time you have a financial question pop up, you would always wonder whether getting an answer to it is really worth $150 for an hour of our time. 

In addition, you might wonder if the number of hours you were billed for actually equals the number of hours worked on your behalf. We want our clients to always feel comfortable contacting us for help; no question is too big or too small!

A better way

In order to prevent these types of inherent conflicts and to make things easier for clients to understand, we use a simple flat subscription model that includes both financial planning and investment management services. For most new clients our current fee is $3,000 per year, split up into equal monthly installments in order to make payment easier. The amount of this fee may be adjusted up or down depending on the complexity of your financial situation and how much work we expect to be doing for you.

The services we provide are not substantially different between clients with larger or smaller portfolios, so our fee structure reflects this. This fee amount is based on our costs and what we believe to be reasonable compensation for the value that we provide to clients. You might even already be paying much more than that right now through hidden fees, and not even realize it. 

If your financial situation turns out to be substantially simpler or more complicated than most of our clients, then we may adjust the fee accordingly. You can choose to pay this fee with automated deductions from either your checking account or investment account. If you don’t think that you are getting enough value from working with us to justify the fees paid, then you are free to leave at any time. Transparency is vitally important to us, clients should know exactly how much they are paying for our advice and exactly what they are getting for that payment.

We believe that this approach reduces conflicts of interest to the maximum extent possible, more fairly ties the value that we provide to the fee that we charge, aligns our interests with that of our clients, and allows clients to take advantage of the cost savings from the powerful economies of scale that now exist thanks to modern investment management technology.