How Your Financial Advisor's Retainer-Based Fees Benefit You 

Whether you’re currently looking for a financial advisor or already working with one, you may have questions about the retainer-based fee structure.  This structure offers numerous benefits for investors, and may be more advantageous than working with a commission-based financial advisor, one who charges a certain percentage of assets under management (AUM) for advice or one who charges one-time fees for all services.

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Here’s an overview of the retainer-based fee structure and its benefits vis-à-vis the other compensation methods:


Transparency on Pricing

When you work with a retainer-based fee, you gain the benefit of transparency.  You know how much financial advice is going to cost you going forward. Most financial advisors who work with this structure charge a flat monthly or quarterly fee.  Some charge per year, in arrears.

During that time, you may discuss your financial situation, as well as receive recommendations. You will work with your financial advisor on all aspects of your financial life, including retirement planning, all at no extra charge and with no hidden fees. 

Both commission-based and one-time fee-based advisors, on the other hand, will charge you per trade, product and specific task.  That can be ultimately more expensive than the retainer-based fee model. 

This may particularly be so in challenging times such as the present, where the coronavirus pandemic has sent markets plummeting and the economic outlook is both potentially bleak and very uncertain.  Shifts in your portfolio now and shifts in your portfolio later when the economy picks up can end up being relatively more expensive with commission-based and one-time fee advisors than with a retainer-based fee.

Financial advisors who charge on AUM generally charge a flat percentage, say 1 percent, on the amount of assets.  This method, too, is not as transparent as the retainer-based fee method. If your portfolio falls, you will pay less overall.  Conversely, though, you’ll pay more if it rises.

At Financial Freedom Wealth Management we provide a detailed retainer fee proposal to you so that there are no surprises.  We begin with a no-cost consultation to see if we will be a good fit for your individual needs.  If so, then we will move onto creating a comprehensive financial plan at a per-hour-cost. After your comprehensive plan is completed we will then transition to an agreed upon retainer fee.  We don't ask you to commit to a retainer relationship until after we've developed the comprehensive financial plan so that we have an opportunity to work together, demonstrate our skills, and begin to develop a level of trust and personal chemistry. This retainer fee includes all on-going planning and wealth management services.


No Conflict of Interest

It’s very important to minimize or vanquish potential conflicts of interest in financial advice. Your financial advisor should have only one goal: meeting the personal financial objectives that you have articulated. 

The best type of financial advisor adheres to a fiduciary standard, which means that they must always act in accordance with your best interests.  Most certified financial planners (CFP®s) and registered investment advisors (RIAs) are fiduciaries.

A commission-based financial advisor, however, is not necessarily a fiduciary.  They follow a different standard of suitability.  The investments they recommend must be suitable for your goals.  In other words, if a robust retirement nest egg is your goal, the investments must be suitable to that goal.

But that leaves an important door open in which commission-based advisors may have a conflict of interest.  Those who work on commission may be incentivized to trade as often as possible, because the more trades that take place on your account, the higher their commissions.  A fiduciary advisor could not, because more commissions is not in your financial best interest.

Most commission-based advisors brokers work for brokerages or other financial institutions. Brokers must often meet sales and product quotas, so are incentivized to recommend particular stocks or other financial choices, such as insurance products, whether they are the best choice for your goals or not. 

One-time fee based advisors are also incentivized to sell services or products that may not be well-aligned with your situation or goals, but will earn them relatively more.  This, too, is a potential conflict of interest.

AUM-based advisors have a slightly different conflict of interest.  While it may not earn them more to trade, their compensation is linked to the amount of assets you have.  There are times when asset maximization may not be the most prudent strategy for you, but is the most advantageous financial strategy for them.  They may experience a conflict of interest as a result. 

They may, for example, keep you more invested in the stock market rather than moving part of your portfolio to cash – or keep you in cash for fear of declining markets, even if you might potentially earn more in the future by buying stocks at a discount now.

The best way to avoid conflicts of interest is the retainer-based fee model, because once the retainer is paid, the advisor cannot maximize their own compensation by any choice.  They are free to follow fiduciary standards appropriately.


Comprehensive Advice

The best financial planner will be in a position to give you comprehensive financial planning advice.  This includes advice on your goals vis-à-vis the six major areas of a financial plan:

  • Cash flow (your income and expenditures)
  • Investments
  • Retirement
  • Educational savings for children or grandchildren
  • Risk management (insurance for your assets, including life insurance)
  • Estate planning (wills and taking care of your beneficiaries)

Because each individual’s goals will be different, a good financial advisor will talk to you extensively about yours, so that they can align your goals with their advice.  Do you want to retire early and travel, for instance? Your goals may be very different than someone who wants to be a chief executive officer and build their dream home in one place.

A commission-based financial advisor may not even be thinking about comprehensive financial advice – or your larger goals, for that matter.  They may focus only on investments, retirement funds and risk management, because those are the only products they sell. Your overall financial picture of income and expenditures, as well as educational and estate planning, may be beyond their purview.

AUM-based advisors, similarly, may not offer comprehensive advice.  Most AUM-based firms primarily manage money, which means that their focus will be on portfolios, of investments or retirement funds.

One-time fee based advisors may not be as comprehensive as retainer-based fee advisors.  They will help you with the specific function you pay for. However, they may charge you more, or more unpredictably, than a retainer-based fee advisor, and you won’t necessarily get service in all categories.

In addition, if not asked specifically, they may not consider or even be aware of your overall financial situation or areas other than they are dealing with.  Do you want to retire early but have large student loans, for example? A comprehensive financial advisor would factor in the impact of your loans on your ability to save for retirement, but a one-time fee-based advisor that you ask to set up retirement portfolios may not even be aware of them.

To assure transparency of costs and services, eliminate conflict of interest and maximize comprehensive financial planner, a financial advisor with retainer-based fees is the most prudent choice.

All of the advisors at Financial Freedom Wealth Management are Certified Financial Planners™ which means we are fiduciaries and we put your needs above our own.  Contact us today and start planning for your tomorrow.

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Filed Under: Comprehensive Financial Planning, fiduciary, retirement planning