There are many different fee structures that investment advisors are paid for their services. Many of these fee structures have unique conflicts of interest that can affect the way an advisor gives advice. Minimizing conflicts of interest is a cornerstone value on which Scholar Financial Advising LLC was created.
We reviewed the many different types of fee structures available and chose the one that is most straightforward and most importantly, not based on selling client products or jeopardizing their goals for the benefit of the advisor. We have a flat monthly fee for financial planning services. When we give a recommendation, that choice is not based on how big of a kick back the advisor makes or whether we can build solely your investment account so we can take a larger cut at the end of the year.
The most common fee structure for financial advisors is the AUM or assets under management model. While this is commonly touted as a wonderful choice due to its “fee-only” nature, it is variable based solely on your investable financial assets.
AUM Example: If you have $1,000,000 in your retirement account, the advisor would manage that account and take 1% (most common fee, but this varies) of the account balance. That’s $10,000 per year.
Now what happens when you are doing a great job saving, receive a raise, are on a great track to retirement, and want to buy a $200,000 vacation home. A financial advisor who charges an AUM fee cannot give you advice without confronting a major conflict of interest. If they advise you to take the $200,000 from your investment account, then they will only be managing $800,000 and receive an $8,000 fee. That’s a $2,000 loss for them annually. Or they could advise you to take out a mortgage on the vacation home, which won’t affect their $10,000 fee because your investment account stays the same, but your debt has gone up.
This example is not to say that advisors who charge an AUM fee are going to give poor advice. However, it is an additional conflict that the advisor has to face before giving the advice. If debt is not a good idea, the advisor will have to give that advice knowing that they will be taking a $2,000 hit to their annual income.
Which advise do you think they will give?
Compare this to paying a flat fee every month to your advisor. When we give you financial advice, you do not have to worry whether we are juggling a conflict that will affect our fee that may affect the advice we give.
We provide you with the advice we think it best for you. Period.
Learn more about our monthly retainer services.