What Is Advice-Only Financial Planning—and Is It Right for You?

When searching for a financial planner, it’s important to understand how financial advisors are compensated. Advisor compensation models influence not only how much you pay, but also the type of advice you receive- and whether that advice is truly aligned with your best interests.

Most financial advisors fall into one of two broad compensation categories: fee-based or fee-only. Within fee-only financial planning, there are also two service models, including assets under management (AUM) and flat-fee planning, the latter of which includes advice-only financial planning.

Understanding the differences between these models can help you choose a financial planner whose pricing structure aligns with your values, your financial complexity, and your desire for unbiased guidance.

Let’s take a closer look, starting with the only ethical way financial advice should be compensated.

Fee-Only Financial Advice: Flat-Fee and Advice-Only

To be a fee-only financial advisor means that the advisor charges you a transparent, flat rate for services rendered, and there are no hidden fees or referral kickbacks. Fee-only advisors tend to be fiduciaries (though you should still confirm this during your initial consultation) and do what they do to serve your financial needs in the best way possible.

As defined by the National Association of Personal Financial Advisors (NAPFA), fee-only advisors are "compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product". All to say, a fee-only fiduciary is an advisor you can trust and is who you want to work with. Under the fee-only umbrella are two subtypes of fee models: assets under management and flat-fee, the latter that which includes advice-only advising.

Flat-Fee Advising

Flat-fee financial advisors charge you just as it sounds; you pay a flat fee, either hourly or project-based, to build a financial plan or for hourly advising sessions to answer your immediate questions.

There should not be hidden fees or advisor compensation for selling you a product (e.g. an insurance policy) when working with a flat fee advisor.

Advice-Only (AO) Financial Planning

Advice-Only planning is a pay-for-advice financial planning. It's as simple as that!

With Advice-Only financial planning, you pay a flat fee for financial advice and/or a comprehensive financial plan. Advice-only firms and advisors do not hold or directly manage client investments. That said, we do offer investing advice for our clients, including educating you on how to select a brokerage firm that offers the most low-cost, efficient investment options for your needs, as well as showing you how to implement the investment recommendations.

Assets Under Management (AUM) Fees

The Assets Under Management (AUM) fee method is when an advisor charges your fee as a percentage of your invested assets under their management. For example, if you have a $500k portfolio with an advisor who charges a 1% fee, you will pay them $5k/year in advisory fees. AUM based advising is still the most common route for advising services because it's easy and the fees usually come right out of the investment account, so you don't see it.

While this is a good route for some, particularly those who do not have the bandwidth to learn about investing or stay on top of rebalancing their portfolio, it is often priced in a way that isn't necessarily congruent to the value provided, and can also lack accountability and planning structure. Not to mention, financial markets are what bring the returns to a portfolio, not the advisor themselves, and the fees from this model eat into returns over time.

Here's an example portfolio growth over time, assuming a 1% AUM fee, 8% annual investment rate of return, and a flat-fee advising rate that increases 3% per year to keep up with inflation. The impact of high fees on a client's investment returns is staggering.

What else to watch out for: Fee-Based Advisors

Fee-Based advising means that an advisor may charge you both an out-of-pocket fee, either in the form of a flat rate or as a percentage of the investments they manage for you, as well as a commission from selling you products (e.g. insurance, annuity or investment products), either directly or through a third-party who provides them with the commission.

There is an obvious conflict of interest with fee-based advisors and thus they are rarely able to say that they are fiduciaries, which means that they are not necessarily acting in your best interest at all times. It can be tricky because it sounds similar to fee-only, but the compensation models are totally different.

Fee-based advisors are legally required to disclose that they may be compensated by selling you a product or referring you to a partner provider, but it can easily be lost in translation of the technical lingo and flurry of information during onboarding. Take care to always ask "How are you compensated?" and "Are you a fiduciary?" before working with any advisor.

Sage Financial is a proud Advice-Only financial planning firm.

Advice-only financial planning is wholly unbiased advising based on the dollar and quality of life value of the advice and recommendations provided to the client.

For me, as I strive for absolute transparency and maximum value as an advisor, there is simply no other way than to be an advice-only financial planner. Read more about my planning services.

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📌 Sage Financial Planning LLC is a California RIA providing values-based financial planning and financial advice in San Diego, CA and nationwide via virtual meeting platforms. Sage Financial specializes in serving those who believe in closing the wealth gap: First Generation Wealth Builders who want to change their financial family trees for the better, as well as values-based clients who want to not only achieve financial security and freedom for themselves, but who want to support their communities in meaningful ways and leave the world better than they found it.

For more information on our holistic financial planning offerings, please visit our Service Options page.

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