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What Is Advice-Only Financial Planning?

Updated: May 1

When searching for a new financial planner, it is important to understand the different ways that advisors can be compensated so that you can choose an advisor that charges in a way that matches your needs and values, and most importantly, one who has your best interest at heart.

The typical compensation models include fee-based and fee-only advising, the latter of which encompasses two different styles of planning and service fees: assets under management and flat-fee, including advice-only financial planning.

Let's take a deeper look. First, there are the two principal types of advisor compensation:

1. Fee-Based 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 generally not fiduciaries and are not necessarily acting in your best interest at all times. Sad to say, fee-based advisors are the self-serving few that skew the reputation of financial advisors everywhere. Most advisors in general are fee-only fiduciaries serving clients' best interests at all times.

2. Fee-Only means that an 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.

1. 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, 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 results are staggering.

Difference in portfolio growth of an AUM fee vs a flat-fee over 30 years, showing the benefit of advice-only financial planning

2. Flat-Fee Advising and Advice-Only (AO) Financial Planning is precisely what it sounds like: 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 certainly can and do offer advice on investing for our DIY investor clients, including educating you on how to select a brokerage firm that offers the most low-cost, efficient investment options for your needs.

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.

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