If you’re looking for financial advice, you’ll inevitably be faced with the question of how much you should pay for it. Is it better to pay a flat fee, or to go for a percentage-based fee system? While both have their pros and cons, the answer to this question can depend on your investment goals and what you expect from your financial advisor.
In this blog post, we’ll take a look at both fee structures and outline their benefits and drawbacks, so you can make an informed decision.
Flat Fee
A flat fee is a set amount of money that you pay for a financial advisor’s services, regardless of how much you invest. This fee structure can be beneficial for those who are starting with a small investment amount, as the percentage-based model can end up costing more in fees over time. Flat fees are also transparent, which means you can get an accurate idea of how much you’ll be paying for financial advice from the get-go. However, the downside of this structure is that it can put off those with a larger investment amount as they may feel the fee is too high.
Percentage-Based Fees
Percentage-based fees are a fee structure based on the percentage of your assets under management (AUM). Generally, firms charge 1.1% on the first $1,000,000 of AUM and 0.33% for any dollar after that. The logic behind this is that the more your investments grow, the more your advisor’s fee grows. This fee structure can be beneficial for those with a larger investment portfolio as it incentivises the advisor to grow your portfolio so that their fee increases as well. However, percentage-based fees can also have their drawbacks because when the portfolio decreases in value the fee will also decrease. This can lead to advisors being incentivised to take higher risk strategies to increase the portfolio value ultimately benefiting the advisor’s fee, not the investor’s long-term goals.
Hybrid Model
A combination of a flat fee and a percentage-based fee model can also be an arrangement between investors and financial advisors. This hybrid model allows you to pay a lower percentage-based fee during the growth phase and then switch to a flat fee once your portfolio has reached a certain threshold. This type of fee structure can be very beneficial if you have a large portfolio, which has started to grow at an accelerated rate.
Factors to Consider in Choosing a Fee Structure
Ultimately, the decision between a flat fee and a percentage-based fee structure can depend on a few different factors. It’s important to consider your investment goals and the size of your portfolio before making a decision. For instance, if you’re investing a relatively small amount of money, a flat fee structure may be more cost-effective. Alternatively, a percentage-based fee structure may make more sense for those with a larger portfolio who anticipate substantial growth. One should also consider the inherent risk in the market, as advisors may be incentivised differently with the respective fee structures.
Choosing between a flat fee and a percentage-based fee for your financial advisor can be a tough decision. While there are pros and cons to both models, ultimately, the decision you make should be based on your unique investment needs. It is advisable to have a clear discussion with your financial advisor regarding their compensational structure, the potential of active vs. passive management, and overall risk considerations before making any decisions. By carefully considering the options, discussing your investments goals, and getting guidance from a knowledgeable financial advisor, you’ll have the best chance of maximising your returns, minimise fees and achieve your desired investment outcomes.
At EPG Wealth, we value transparency and charge flat fees for our clients. If you would like to improve your current investment strategies or are looking to start your investment journey, click here to organise a complimentary 20-minute phone call with an EPG Wealth adviser.