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The retainer fee model is the perfect option to ensure that financial advisors and their clients are working towards a common goal for a successful investment strategy with no conflict of interest.
Traditional fees for managed assets
Financial advisors commonly charge what is called an asset under management (AUM) fee for their services. This model allows financial advisors to charge their clients a percentage of the dollar amount they manage.
If, for example, you have a $500,000 portfolio, your advisor may charge you 1% to 2% of that amount in fees. Therefore, you would pay them around $5,000 to $10,000 per year for managing that portfolio. This can be overly expensive and creates a potential for conflict of interest as advisors are incented to mislead investors in order to make more money on managed assets.
A common second way of charging clients is a commission fee. In this model, financial advisors will recommend investors buy certain financial instruments and then charge a percentage of commission on that instrument. Common investment instruments include insurance products, mutual funds, and annuities. Each of these financial instruments will likely help advisors earn a high commission.
Advisors have a conflict of interest to encourage investors to make decisions that don’t meet their financial goals or ignore their risk tolerance when determining what investments are chosen; instead, deceitful advisors will recommend financial instruments that will increase their commissions.
The retainer model
A retainer model differs significantly from the traditional commission or asset management fees most financial advisors charge. A retainer model is based on a fixed fee charged for all services. The fee is charged hourly, monthly, quarterly, or annually, depending on the advisor. An investor pays that fee, and the advisor will provide sound, comprehensive, and uncompromised financial planning advice in return.
In this model, an advisor doesn't even need to manage your assets. Advisors may offer advice on the market without having to hold on to your portfolio. My firm, Creative Capital Wealth Management Group, charges a quarterly or annual retainer fee to provide regular advice to clients.
How the retainer model is changing the planning profession
The retainer model offers a new way to invest money without having to overpay financial advisors. This model is beneficial for both advisors and investors because it eliminates conflicts of interest and ensures security for all parties. Just because an advisor offers a retainer model does not make them inherently honest, but it removes the temptation of recommending advice based on personal gain.
The ability to maintain control and receive extensive financial advice is a huge benefit for those who want more control over their investments while not giving up the reassurance that comes with professional advice.
Unlike other models, the retainer fee model ensures that financial advisors' interests are closely aligned with their investors' goals. A financial advisor working under the retainer model will spend more time and energy delving into their client's goals and objectives.
The Fiduciary Rule, set in place by the Department of Labor, requires financial advisors to work in their clients' best interests. The retainer model makes this fiduciary responsibility much more plausible and effective for both advisors and investors.
The retainer model will provide investors and their advisors with a solid foundation for their financial transactions and portfolios. Financial advisors are protected from the impact of market movements on clients’ assets, allowing them to focus on clients’ wellbeing and value-added services such as helping clients plan for retirement, performing cash-flow analysis, and executing tax planning.
Bottom line
The retainer model is changing the profession. As new investors seek financial advisors to support them in their financial goals, more will seek a model that provides them with comprehensive advice and complete control over their investment portfolios.
Fred Hubler is founder and president of Creative Capital Wealth Management Group. To learn more about CCWMG, please visit https://ccwmg.com/. Follow Fred on Twitter at @HublerFred.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
