Key Points:
- Discover the Financial Impact of Flat-Rate Fees: Uncover how a flat-rate fee-only advisor can optimize your investment growth, differentiating it from traditional Assets Under Management (AUM) fees, and potentially leading to significant long-term financial benefits.
- Comparative Analysis of Fee Structures: Explore a detailed comparison between a 1% AUM fee and a flat-rate fee, showcasing the tangible differences in portfolio growth over time and why a flat-rate fee-only advisor could be a more advantageous choice for your investments.
- Long-Term Benefits of Flat-Rate Advisory: Learn how choosing a flat-rate fee-only advisor aligns with effective financial planning, offering transparency and stability in fees, which can translate into substantial savings and enhanced portfolio value over the years.
Introduction
We’ve already written about the quantifiable benefits a financial advisor can provide, the most important of which is behavioral coaching. If you forgot, the study found financial advisors can provide up to 3% higher returns than going it alone. But now we’re going to discuss fees.
The fees you pay can significantly affect how much your portfolio grows over time. You might have heard of two common ways fee-only financial advisors charge for their services: a percentage fee based on your total investment (Assets Under Management or AUM fee) and flat-rate. We have discussed some of the conflicts of interest in each model type in other articles. Now, let’s look at the cost impact.
The Impact of Fees on Your Investment
Imagine two people, Alex and Chris, each starting with a $1 million investment portfolio. Alex’s advisor charges a 1% AUM fee, while Chris’ advisor charges a flat annual fee of $7,200 (currently Purpose Built’s highest fee) that increases slightly each year to keep up with inflation. Over 20 years, these two fee structures can lead to very different outcomes for their investments.
Early Years: Seeing the Difference
In the first few years, the difference between Alex’s and Chris’ portfolio values might not seem huge. But as time goes on, this gap widens significantly.
The Long-Term Picture: A Significant Gap
By the 20th year, the difference in the value of their portfolios becomes quite significant. Over that time, Chris would have paid $$174,389 less in fees. And while both started with the same amount and earned the same rate of return, paying a flat-rate fee resulted in a $291,106 higher final portfolio value:
That is a couple of years of long-term care right there.
Choosing the Right Fee Structure
The percentage of AUM model continues to exist because some people, unlike you, are sold on it being “just 1%.”
There are better models out there, and you have found it.
Frequently Asked Questions (FAQ)
Q: What is a flat-rate fee-only advisor?
A: A flat-rate fee-only advisor charges a fixed annual fee for financial advisory services, unlike the traditional percentage-based AUM fee. This fee structure is transparent, predictable, and aligns the advisor’s interests with those of the client.
Q: How does a flat-rate fee structure impact long-term investment growth?
A: A flat-rate fee structure can have a positive impact on long-term investment growth. By avoiding the percentage-based fees on the total investment amount, investors can retain a larger portion of their portfolio’s growth, compounding over time.
Q: Why might a flat-rate fee-only advisor be a better choice than a traditional AUM fee advisor?
A: A flat-rate fee-only advisor can be a better choice because of the transparent and predictable fee structure, which eliminates conflicts of interest associated with percentage-based fees. It ensures that the advisor’s recommendations are solely in the client’s best interest, focusing on maximizing investment returns rather than the size of the portfolio.
If you have any questions about reaching your financial goals, defining what those even are, or want to explore how a Flat-Rate Fee-Only structure can help you achieve your goals, set up a time to talk.
Your financial well-being is too important to leave to chance. Choose wisely.
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