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Retainer versus Asset Under Management Financial Advice

I have had the same financial advisor over the past few years and have gone through 3 others before finding Andrew. In this post I’ll discuss the various fee models for paying financial advisors. The two which are often debated are the retainer model and the asset under management (AUM) fee model.

As a reader pointed out, the fee-only model can refer to either a monthly ongoing fee, a retainer model, or an asset under management type of model. All of these hold the financial advisor to a fiduciary standard.

The terminology is very confusing and I’m not a fan of it. A fee-only model should mean that you pay a monthly or annual set fee. However, it also captures a percent-based model where the financial advisor charges you a percent of your portfolio every year. The more money you have the more you pay under the percentage-model which is what is referred to in the industry as the AUM.

 

Evaluating Financial Advisors

The pervasive argument is that because most financial advisors suck or that many are charlatans, it’s not a good idea to have a financial advisor. The same could be said about investors, bankers, and physicians. It’s a weak argument and suffers from generalization.

On the flip-side, those who are wealthy have multiple specialty-focused financial advisors – some who handle securities investing, some who do estate planning, and those who handle the finances of their businesses. Are they rich because they have these advisors or are the rich just frivolous with their money?

I will break up the skills of a financial advisor into 3 factors, their knowledge base, any informational edge they might have, and how likely they are to motivate you to make the right financial decisions.

1. Knowledge

By knowledge I am referring to the general concepts and ideas of personal finance. A competent financial advisor will know what assets to invest in, how to maintain some tax efficiency, and how to extrapolate investing into the future for the sake of retirement planning.

They will have knowledge of all the different investment plans out there such as 401k’s and Keogh’s and TSP’s.

The physician, for comparison, would have the full understanding of diseases, medication prescribing, and surgical skills. Most of this information can probably be found online with enough research.

2. Information Edge

Is there some information that only a financial advisor has which I cannot get my hands on? Unlikely. But they would have experience and that could be an informational edge – it’s less tangible but it’s an edge nevertheless.

Now, the financial markets aren’t a science even though we throw out numbers when trying to explain them. That doesn’t mean that you can’t build experience. A financial advisor who has been doing his/her work for 35 years will likely be quite potent.

In comparison to medicine, a physician has a ton of informational edge. There is a lot of information that you just can’t learn in a book and had to learn by experience and apprenticeship. Surgeons are a great example for this.

3. Motivation

Can your financial advisor motivate you to invest and save? I have several friends who have met with their financial advisor and comment to me that they just aren’t motivated to do all the things necessary that the planner drew out.

Here, a good financial advisor might have an edge over another because they are able to entice you and motivate you by showing you graphs or paint a picture in your mind of how much better off you’ll be if you follow steps x, y, and z.

In medicine, my patients look to me to motivate them to lose weight and to adhere to their medications. I am judged by how adherent my patients are to their healthcare plan. I definitely see this the longer I’ve practiced medicine. My attitude towards my patients and their condition reflects how likely they will listen to my advice or otherwise bounce back to another doctor.

 

Need for Financial Advisors

As a single dude physician who earns a very high income, do I have a need for a financial advisor? Will they do something for me without which I would be worse off or with which I might be better off?

To answer this we need to figure out why we save, invest, pay down debt, and try to have a retirement stash. After all, these are the most common personal finance matters on minds of the layperson.

As a medical professional I want to make sure that my financial future is secure, the same way I want to make sure that I am healthy in my later years. So, I save, invest, and pay down debt in order to be well-off financially at some point in the future.

If I work long enough and make more good decisions than bad, I should have no trouble whatsoever to be well-off financially. Therefore, there is no urgent need for a financial advisor.

I could make a comparison to a family medicine physician. Never in the history of the US have family physicians been less useful and more needed at the same time. We bring very little value to our patients and yet the majority of US citizens would be much healthier if they heeded the tenets of family medicine advice.

Those who don’t need a financial advisor:

  • you are planning to work until you drop
  • you have fairly healthy spending and saving habits
  • you have no or few dependents
  • you have a solid extended network
  • you’re a white male with decent health
  • you don’t anticipate divorce or a financial disaster

Those who need a financial advisor:

  • you want to retire much earlier
  • you want to have the highest net worth possible
  • you are at risk of burning out of your job
  • you are incredibly risk averse or can’t assess risk well
  • you live in a very high cost-of-living city
  • you are a woman or a minority or you have shitty health
  • you want to minimize work and maximize retirement

 

Financial Advisor Payment Models

If you have identified a need for a financial advisor then you must deal with the next exciting topic of how to pay the dude, or in rare circumstances, the lady.

Hopefully the financial advisor didn’t find you and you found them. In the latter case, you might be limited to whatever payment model this financial advisor offers.

Retainer Payment Model

With the fee-only payment model I am referring to someone who charges you a flat hourly, monthly, or annual fee for their financial services. I don’t consider the AUM to fall under this, though in traditional lingo it does, in fact.

I’ll refer to it as the retainer model to prevent any confusion. You pay a monthly or annual retainer to your financial advisor and they work with you for that set price. No percentages to worry about. As in, you won’t be penalized for having more money.

This financial advisor might charge you $250/hour or $150/month or $5,000/year – just as examples.

Andrew and I have worked out a monthly fee model. That means I can fire him anytime I wish and he can fire my ass whenever he wishes. For this monthly fee-only payment model I get to engage with him as often as I need to.

I’m sure if it got to a point where I was using up his time excessively, he would charge me extra. So far it’s been a wonderful, mutual experience – for me at least.

Asset Under Management – AUM fee model

In the AUM fee model, the financial advisor charges the client a percentage of the assets which he/she manages for that client.

If Andrew was managing $300k of my money then he might charge me 0.75% per year or $2,250 per year or $187/month. Usually the fee is paid once annually.

This 0.75 percentage fee might go up as you have more money or it might go down, depending on the financial advisor. Most seem to charge in the 1% annual range. So once you have $5M under management, you’d be paying $50,000/year.

 

Retainer Model

What I like about the retainer model – whether monthly or yearly – is that it removes all biases and incentivizes both the advisor and the client equally.

The advisor needs to continue providing a value to the client in order for the client to continue paying the advisor money. And the client will need to adhere to the advisor’s advice in order to make the most of their fee-only payment.

Upfront Cost

Most retainer-based financial advisors charge an initial planning fee which is separate from the ongoing payment.

This might be something in the $1,500-2,500 range to do all the research and planning necessary to come up with a good financial plan for the client.

Ongoing Retainer Fees

Once this is done and the client is satisfied with the plan, there is the ongoing payment. As I said, mine is monthly, automatically deducted from my account by my financial advisor. The amount will range from $100/month on the low-end to $500/month and even higher. It all depends on the complexity of the client’s financial situation.

Cancellation

It’s important to me that I can cancel at any time with my financial advisor for whatever the reason might be. Maybe I want to take over my own financial planning, maybe I found a better financial advisor, or maybe I can’t afford the service anymore. Though the latter point is sort of ironic and deserves a book written on the topic.

Cancellation is easy. “Dear financial advisor, I would like to cancel my ongoing fee-only plan with you. This is my 30 day notice, please let me know that you confirm this.” Or, I should say, it should be easy in theory. I had a hell of a time when I fired a previous financial advisor because he had found himself a sucker and wasn’t about to let go easily.

Ideally, you provide a reason in order to help the financial advisor improve on their future services. Or you just say good luck and good riddance.

Hourly Rate

The fee-only structure could also be an hourly rate on a prn basis. You have a financial advisor with whom you meet once a year or every years whenever your financial situation changes.

Maybe you just meet with the financial advisor when you are about to make major financial decisions. The problem I see with this is that unless you’ve worked with this person for a long time, it’s hard for them to know you well enough to give you custom advice.

Before Andrew, I paid a CPA who moonlighted as a financial advisor $400/hour to provide me occasional financial advice. It worked out well for both of us but I ran into the problem I highlighted above.

Downside to the Retainer Model

The only downside I see here is for the financial advisor. If you use them for a year and then stop paying them then they will lose out on a lot of hours which they invested upfront.

If you then decide to restart with them in the future, they will need to play catch-up which, again, is a big time investment for them.

The downside to the consumer might be the high hourly rate but as a family medicine doctor who is now making $250/hour, I am comfortable paying a financial advisor at least that much to help me achieve my financial goals with a lot less friction.

 

Asset Under Management – AUM

If my financial advisor is managing $1M of my money and charing me 0.75% annually, then I am paying them $7,500/year. This might seem like a lot but if you consider that one simple advice, such as moving some money into a tax-advantaged account, could save you $100,000 over the next decade then you already got a great return on your fees.

This is that sweet-spot that separates the rich from not-so-rich, knowing when you are paying a fee and when that fee is an investment in your future.

The Logic

You and I get the hourly rate of a medical professional because we know what we get paid hourly. I wouldn’t do clinical work for less than $200/hour these days.

But it’s harder to grasp the logic of a percentage model when it comes to an investment portfolio… unless that portfolio is incredibly diverse, complicated.

If I have money invested in another country, in real estate, in gold coins, in cryptocurrency, in REITs, index funds in a 401k, a Roth IRA, and an HSA, well shit, that’s a lot of things for a financial advisor to keep track of. The only sustainable way for them to handle all this would be to charge you an AUM fee model.

Simple Portfolios

I am as vanilla as vanilla gets when it comes to investing – I would think that Andrew agrees with this. I am not investing in oil fields in Alaska nor solar fields in Iran.

I have index funds and some real estate investments. These are very hands-off investments, intentionally. I don’t do well with complexity, not in investments, not in relationships, and not in my own profession.

A simple index fund portfolio worth $1M is not much different from a $2M or $3M portfolio. So, paying more money because it’s larger doesn’t make much sense. However, this is true up to a certain point. After a particular net worth, other complicating factors enter the equation which require more work on the part of the financial advisor – particularly in the estate planning department.

Downside to AUM

The downside to AUM, therefore, is that I would have to pay more as I save and invest more. It might also negatively incentivize me to hand over other assets to my financial advisor for the sake of planning.

For example, if I have a paid off house which I am going to start renting out, I may decide to handle that myself or else pay even more money to the advisor.

 

In Summary

I am a strong believer in paying an expert for their advice especially when that advice will profit me financially. That’s why I pay money for books and pay my lawyer $300/hour to handle my medical board investigation ordeal.

Building a relationship with a financial advisor is very important because their advice needs to be geared towards you. Unlike a condom, it’s not a one-size-fits-all. It might be painful to keep paying money and feel that you’re not getting anything in return but in the long-run a financial advisor’s advice will put more money in your pocket.

Finally, because my investment portfolio is plain vanilla, I don’t see the need to pay my financial advisor more money as that portfolio grows in size. That’s why I prefer the fee-only model more than the AUM model.

2 replies on “Retainer versus Asset Under Management Financial Advice”

You are correct. I had put in a paragraph in this post to indicate that I don’t agree with the terminology. But to prevent any confusion I changed the word to retainer. An AUM isn’t a fee because it’s not set – it’s a percentage. That can be very confusing. A fee should be predictable and not fluctuate with the value of the portfolio. Hope this clarifies the difference.

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