All Michael Kitces has to do is post a blog expressing a different angle on fee-based advisory models and 26,000 people read it. I’m not knocking Michael – I love Michael’s writing- but it shows you how advisors flock like moths to a flame with this stuff. Heaven forbid they should be ignorant of the latest news on how they are getting paid.

You don’t hear social workers clamoring right and left about how they get paid. You don’t hear them debating about why they should get paid per client rather than per hour or something ridiculous like that. Because they, the social workers, are an example of a profession that truly does put the needs of the clients before their own. They don’t care if they starve to death doing what they do, which is why you don’t hear social workers having the “Great Fee Debate,” as I call it, that we have here in advisor world.

Admit it, financial advisors. You’re fee obsessed. And that’s the #1 reason it is disingenuous that everyone has to pretend to be Mother Theresa on their websites and in every single aspect of marketing they communicate to the world.

The latest trend: Flat-fee investment advice

So now that I have all of your attention because I’m talking about getting paid, let me discuss the latest trend in advisor compensation, which charging a flat-fee retainer for investment advice. I emphasize that it’s not a flat fee for financial planning.

We are talking about an advisor managing assets with no tiered fees, asset-based fees, or commissions. They charge one amount, the same amount, to all clients and they manage these clients’ assets no matter how big the portfolio.

Example: A 60-year old with $5,000,000 portfolio who needs retirement planning pays $4,000 per year; a 35-year old with $5,000 portfolio and $50,000 in student debt and who needs college planning for her family pays $4,000 per year, etc.

The sizzle on this steak for the clients is that it removes the incentive for the advisor to recommend putting money to work in the market. For example, let’s say someone has student loans to pay off and they just got a big bonus. The advisor is more likely to recommend putting money into an IRA and brokerage account because he or she can get paid that way rather than paying down the loans. The same with paying down mortgages or investing in real estate, physical commodities (e.g. buying gold bars), fine art, etc.

Trading one incentive for another

While I commend these advisors for their noble way of thinking, don’t assume this is going to create optimal outcomes for clients.

What is the incentive of a flat-retainer fee approach, I ask you?

Well, I only once charged a client a flat fee when I was an advisor and it was a case where the woman wanted a second opinion on money she had managed at a big brokerage house.

The whole thing took me two hours. I sat in her office and went over her portfolio and then she gave me a check. There was little analysis or follow-up work.

And that’s exactly why I consented to this arrangement. Because if it had required more of a time commitment, then I would have suggested moving to an hourly or tiered fee approach.

I’m actually the victim of the flat-fee problem. My accountant charges me a flat fee but due to the fact that I had another kid and had a banner year for my business, he has much more work to do this year on my tax return. He’s making mistakes right and left and a month off of tax day we still haven’t had the return done. It’s clear that he feels he should have been paid more than the flat fee he’s charging me.

The hourly approach is biased, too! We all know what that is. Ask anyone who has consulted an attorney.

There are biases in every form of advisor compensation. There is no 100% perfect way to charge people. It depends on the time required to do the work and the level of service the person requires.

Some say tiered fees are bad because it encourages advisors to take risk to grow the portfolio. People also say it’s not fair that they have to pay a fee when the portfolio goes down because the advisor hasn’t justified their value.

The question is which bias the client can live with and which one is going to make them bitter and resentful of their advisor.

The inevitable outcome of flat-retainer fees

Here’s what is going to be the unfortunate outcome of flat-retainer fees. Let’s take example of Sally, the client of an advisor who charges a $4,000 flat-retainer fee.

Sally consents to this arrangement because she recently graduated from law school and has very modest assets to manage. Most advisors would charge her 1% and seeing that she has only $3,000 in a brokerage account, the value lost would be too great. She does need advice on her 401(k) and a loan pay-down strategy. Her advisor gladly provides this service and charges the $4,000 annual fee.

But over time, Sally’s needs change. She has kids, she gets a mortgage, and all of sudden the advisor has to work with her accountant and her lawyer and her mortgage banker. She accumulates assets that he manages so any time the market dips she’s on the phone with him.

How happy is the advisor now?

And by the way, Sally’s lawyer has a brother-in-law who works at Raymond James. He wants her to attend a steak dinner about investing in one of their private-equity funds. She agrees to go because she has kids and would love for someone else to have to serve dinner (trust me, as a mother it does go through your mind) – and by the way foot the bill for it. Then the rep keeps following up and now Sally says she wants to withdraw half her portfolio and get into the fund, paying the rep a huge commission that funds his family trip to the Bahamas.

I repeat, how happy is the advisor now?

Three years into the relationship with the Raymond James rep, Sally contacts her original advisor to tell him that she wants to stop working together. The Raymond James rep has offered to manage her assets for a tiered fee and provide the financial planning for free.

What he’s saying is that he won’t do much past some basic retirement calculations using his firm’s online calculator. But Sally doesn’t know that. She drinks the Kool-Aid and trust me the big firms can serve up some super sugary, ultra-jacked-up Kool-Aid.

They have the deep pockets that small, independent firms don’t have!

Is the advisor happy now?

No.

Sara’s upshot on flat-retainer fees

Look, I love the idea of charging all clients the same fee and treating everyone equally. Let’s have a second Woodstock festival while we’re at it. But advisors will inevitably undercut themselves. It’s impossible to gauge the lifetime workload a client will require.

Flat fees will lead to low margins. That always comes back to the client in the form of poor service. Flat-retainer fees are not sustainable. Agree, disagree? Hit me up on APViewpoint with your opinion.

Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers. Sara graduated from Harvard with a degree in English literature and has an MBA from NYU Stern in Quantitative Finance.

Read more articles by Sara Grillo