The Retainer Model is the Future for Financial Planning

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

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.