Level Wealth Management is a Flat-Fee Financial Advisor.
Our flat fee of $9,600 ($2,400/ quarter) per household is simple and transparent. It doesn’t cost us any more to manage $3 million than it does to manage $1 million, so why should you, the investor, pay more? The more money we can save our clients, the sooner they’re able to reach their goals.
People naturally gravitate to the area of their job that compensates them the most; it’s human nature. This can create potentially hazardous blind spots and conflicts of interest. This is especially true in the personal finance industry. Insurance salespeople who are paid commissions tend to think insurance is the answer to every financial question. Advisors who are compensated based on how much of your money they manage tend to think that investing in the stock market with them is the only solution.
There is nothing wrong with insurance or investing in the stock market, both play very important roles in comprehensive financial planning. The problem originates from binding an advisor’s compensation to an end result; creating a conflict of interest between the client and their fiduciary.
HOW A FLAT-FEE Advisory relationship REDUCES CONFLICTS OF INTEREST
For example, an advisor who is paid based on the amount of investments they manage may discourage their client from selling investments to pay down debt because that would reduce the advisor’s compensation.
Another example of a potential conflict involves certain investments only available in employer sponsored retirement plans such as stable value funds or guaranteed interest holdings. These products sometimes offer stronger interest rates than comparable bonds without the same volatility. An advisor that charges a percentage based on assets has an incentive to move those investments to where they can manage and charge fees on them instead of potentially utilizing everything available to the client.
Our goal is to remove conflicts of interest with our relationships so that we can devote 100% of our focus to their needs and respective goals.
Flat Fees vs. AUM Fees Over Time
One of the best predictors of a fund’s future performance is cost. Due to this research, many investors and advisors have implemented lower cost funds in their portfolios. While this is a step in the right direction, advisor fees can’t be excluded from the conversation.
Over time, an asset under management (AUM) fee of 1% can become a significant drag on a portfolio’s performance. The graph to the right compares $3 million dollars invested in a 60% stock/40% bond portfolio over the 10-year period ending 12/31/2021 with different advisor fee structures. The portfolio paying a flat fee of $2,400 per quarter ($9,600 per year) finishes with approximately $538k more than the portfolio that is paying an ongoing 1% AUM fee. This significant difference in ending portfolio value is attributable to the higher cost of AUM fees combined with the opportunity cost of lost growth on those fees.
The inequality between a flat fee of $9,600 and an AUM fee of 1% can be large in one year, but over a ten-year period, that difference can be incredible. After 10 years of using the above assumptions, the cumulative 1% AUM fee alone is $ $449,331 vs. $96,000 for the $9,600 flat fee.
Performance Disclaimer: Portfolio assumes an investment of 40% Vanguard Total Bond Market Index Fund Institutional Shares, 39% Vanguard Total Stock Market Index Fund Institutional Shares and 21% Vanguard Total International Stock Index Fund Investor Shares rebalanced every 12 months. This report is for illustrative purposes only. Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Average annual total returns include reinvestment of dividends and capital gains.
