Should I pay an $8,000 flat fee or a $35,000 asset-based fee on my $5 million estate?

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I am retiring and am working on hiring a fixed fee or fee-only (AUM) advisor to help with retirement planning and ongoing investment advice for an estate worth $4-5 million. There's a big cost difference between the two: a fixed fee is about $8,000 a year, while a fee-based consultant charges about $35,000. The flat fee is tempting but I wonder if I will get the same service?

-Dave

For many investors, fee is one of the most important criteria to consider when interviewing potential advisors. On the surface, two advisors may look very similar, but their fees can be very different. how so? Dave, as you acutely realize, this often comes down to the level of service provided by each advisor.

Looking for someone to help you plan for retirement or manage your investment portfolio? SmartAsset’s free tool can match you with up to three fiduciary financial advisors.

Flat-fee and fee-only (AUM) advisors sometimes have different service models, which can result in significant differences in annual fees. We'll explore the implications of these two fee structures, reveal some potential differences in service models between the two advisors, and provide advice on how to evaluate each advisor.

Financial advisors listen to potential clients during free consultations.
Financial advisors listen to potential clients during free consultations.

Fixed fees and asset-based (or AUM) fees are the two most common advisor compensation structures. As stated in the question, when working with a fixed-fee consultant, you pay a certain absolute dollar amount each year for the consultant's services - in this case, $8,000 per year. The dollar value of the fee does not fluctuate based on the amount of money the advisor manages for you. Payments may be made in installments or upon reaching certain milestones. For example, a fixed-fee advisor may ask you to pay 50% upfront and the remainder upon delivery of the financial plan.

Fee-only advisors, on the other hand, charge a percentage based on assets under management (AUM). Therefore, the actual dollar value of the annual fee paid will depend on the value of the portfolio managed by the advisor. So the $35,000 fee your advisor quotes you may be different next year, depending on how your portfolio performs.

Because they are paid more as your assets grow (and vice versa) and do not receive commissions for selling investment products, fee-based advisors are considered to have relatively strong alignment with their clients' interests. However, it could also create an incentive for advisors to manage a portfolio too aggressively or too conservatively, depending on whether they prioritize fee growth or stability.

In a fee-only relationship, fees are typically paid quarterly and drawn directly from the portfolio balance. Fee-only advisors often use a tiered or scaling system to calculate percentage fees - as assets under management increase, the percentage fee typically decreases. (If you need help finding a consultant to work with, try SmartAsset's free tool matching tool.)

While factors such as experience, seniority, firm size and branding can influence pricing, service delivery is likely to be the main differentiator between the two consultants being considered. Let’s take a look at a few key areas of “service” to evaluate, as well as some questions you can ask yourself and potential advisors.

Sometimes advisors who charge a flat fee simply provide a financial plan for you to follow. This means they may not manage your assets on a daily basis. If so, how will you manage your investment account? Will consultants be outsourced? If so, what are the additional fees associated with participating, and how will advisors ensure that the investment strategy is consistent with the plan they created?

If the advisor doesn't outsource portfolio management, do you have the skills, interest, and ability to do it yourself? Given the fee structure of fee-based advisors, they will most likely manage your investments directly. Still, it's important to understand what these services mean and how the strategy aligns with your overall financial plan.

Managing an estate and estate planning may seem crucial to your situation, but are often complex and require consideration of multiple generations. While this is not always the case, a larger asset pool such as yours may increase the complexity of the services required to meet your needs. You need to understand how equipped each counselor is to help you navigate the complexities unique to your situation.

A good question is: "Can you describe how and when you would make adjustments to our plans and portfolios (if you were managing your assets directly)?" Likewise: "As you make these adjustments, what will impact you as a Consultants and Team Decisions?" This will help you understand how your team is structured and what drives the decision-making process.

As with any advisor, you'll want to know that they'll be meeting with you regularly. How many meetings do you have with each consultant each year? What deliverables do they provide you? How are they implemented?

In other words, do they provide a plan and let you implement every part, or do they do most of the subsequent execution for you? In terms of high-end exposure, are they effectively serving as on-call outsourced CFOs? Who are the main contacts and how much support do they have behind the scenes? Finally, consider the level of complexity and customization required to execute your plan, and ask yourself what level of accessibility you need and how much help you need with implementation.

When considering the differences in services, remember to relate them to your goals for managing your estate. Are you seeking to protect and preserve a legacy to pass on to the next generation, generate retirement income, or fund charitable goals? It's likely a combination of some of these, but which advisor and fee structure ultimately best achieves these goals?

If you determine that a higher-cost advisor provides the right services for your needs and goals, the fee may be justified. (If you’d like to broaden your search for financial advisors, SmartAsset’s free tool can match you with up to three fiduciary advisors.)

A man talks to a financial advisor during a virtual meeting.
A man talks to a financial advisor during a virtual meeting.

Ultimately, the choice comes down to your personal priorities, which of course includes cost. While it's important to evaluate how well each advisor's services fit your needs, it's equally important to consider the various subjective factors in the decision. How did you feel when you met them? How would you compare the level of trust established with each advisor? What is their motivation? Do they fit your goals? Finding the right functional and emotional fit is critical because successful counseling relationships tend to be long-term in nature.

A helpful practice to help gather ideas and make unbiased choices is to list your priorities, assign a weight to each item, and rate each item on a scale of 1 to 3 or 1 to 5. If weighted scores are reached, you may choose a tiebreaker to determine equality. This exercise can help you stay objective and avoid making decisions based on the wrong factors.

Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers readers' questions on personal finance topics. Have 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. Additional resources from the author can be found at: Database root directory.

Please note that Jeremy is not a SmartAsset AMP participant, nor an employee of SmartAsset, and he has received compensation for this article. Some reader-submitted questions have been edited for clarity or brevity.

Image source: ©iStock.com/fizkes, ©iStock.com/hobo_018

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