In the last few years there has been endless debate in my industry about how financial planners should get paid. The two main options are to be paid on a percentage basis or on the flat dollar.
For example, for a client who has $500,000 in retirement savings under a 1% fee structure would pay $5,000 per annum. If this figure grows to $600,000 the fee increases to $6,000, and if it drops to $400,000 the fee would be $4,000. Alternatively, they could pay the adviser a flat fee of $5,000.
Here’s the kicker; I don’t think it’s important and have met great advisers who charge either way. It comes down purely to the preference of the adviser and the client.
To me, the more important question is; are you getting value for the fees you are paying?
You could pay an adviser $3,000 per year but still be significantly out-of-pocket if they make mistakes, or miss some possible tax savings, or invest your retirement savings inappropriately.
On the other hand, I have seen advisers charge $30,000 per year and thought it was a bargain. Their clients’ situations are highly complex, they are saving their clients so much in tax and the risks of getting it wrong are so high.
At Lighthouse our model is simple. We charge 1%.
My job is to get you from where you are now, to where you need to be to retire. If you consistently listen to my advice and stick to the plan you will get there as quickly and as safely as possible.
If I do a great job and your retirement savings grow over time I get paid more. If I don’t do a great job I get paid less. To me this is the simplest and most transparent way to get us working together.
I’m not being paid 1% to ‘get a good return’. I’m not being paid 1% to ‘beat the market’. I’m not being paid 1% to ‘make sure you’re in the right fund’ every year. I’m being paid 1% to make sure you sleep at night knowing you are doing everything you possibly can to meet your goals.
If you don’t have an adviser do you think it’s possible I could either: save you 1% in tax, help you earn an additional 1% investment return each year, save you 1% in not making mistakes each year, or save you at least 1% in time and worry?
If you’re not sure ask me and I’ll explain how and where I can in an initial meeting. If I can’t add enough value to justify charging a fee, I’ll tell you.
If you do have an adviser and don’t already know the exact answer, don’t be afraid to ask what fees am I paying and what do I get in return?
If you get an answer you’re comfortable with, great. If not, it might be time to dig deeper.
Written by Dallas Davison.
Dallas Davison, Michael Hogue and Ali Hogue.