The Value of Working with a Financial Advisor

Why it could cost you more NOT to work with a financial advisor.

Financial Planner. Financial Advisor. Investing Advisor. Despite slight differences, the titles are used nearly interchangeably. All three share the goal of helping you strategize and optimize your finances, now and in the future. 

And employing the services of any one of them is really expensive. Right?

Wrong. 

But before we get into the why, we have to understand how financial advisors get paid. This list isn’t exhaustive, but there are three primary ways:

1. Commissions
2. Flat Fees
3. Fee-Based

 

1. Commissions

When financial advisors work with some large firms (who shall remain unnamed) they are what’s called “captive.” 

The name is appropriate. As representatives of the company, their main job is to match their clients with the firm’s products that are “reasonably” suited to them. Essentially, they are salespeople for the company they represent, and as such, will take a commission based on the product they sell to the client. 

Since they get paid up front — usually between 3-5% of what the client has invested — their cut isn’t directly related to the client’s portfolio performance. This means that, for the life of the product, there’s little incentive for them to actively manage investments past that first day when you’re signing the check. 

I mean, what’s in it for them?

It’s similar to what a real estate agent does. They help you find and buy a house, but when the deal is done (and they have their commission), you don’t see them until the next time you’re ready to buy or sell. 

Sure, they’ll leave you a stack of cards, maybe a promotional bird calendar, but they’re definitely not sticking around to help you maintain the house. 

Of course, commission-based financial advisors are motivated to keep you cycling through their sales funnel. But anti-churning laws actually prevent them from selling new products to clients, thus earning them new commissions, before some time has passed. And some products have a life span of three, five, even ten years. 

That’s a lot of time for your portfolio to go unmonitored.

The commission model was popular in the past, but the market has evolved over time. People have started to demand more from advisors — more actual advising and active management of their investments. 

 

2. Flat Fee

A financial advisor who charges a flat fee gets paid annually for their services based on an agreed upon amount, rather than getting a commission based on financial products they sell you. 

The advantage of this is that it mitigates the conflict-of-interest commission-based advisors have — meeting quotas and boosting their commissions vs. acting in the client’s best interest. 

The disadvantage is that, because a flat fee isn’t tied to a portfolio’s performance, and thus the advisor’s attention to it, their compensation doesn’t grow or shrink along with their clients’ investments. 

Meaning, again, little motivation to actively manage your portfolio. 

The flat fee advisor’s interest isn’t quite as divorced from clients’ returns as a commission-based advisors is. Flat fee advisors do have to consider that yearly decision for clients to renew their services, rather than the multiple years commission-based advisors do.

Because the flat fee model has removed most incentive away from the asset itself, it works well for financial planning services. 

It’s also a good option for clients who would like to work with financial advisors, but who haven’t yet met the minimum investment capital requirements.

 

3. Fee-Based 

As people have begun to demand more from their financial advisors, the fee-based model has risen in popularity. 

A fee-based advisor’s compensation is directly related to their clients’ portfolio performance. This creates an incentive to be more involved with active management, beyond annual reviews or semi-annual check-ins.

Using this model, the advisor’s role is quite different. 

They aren’t collecting an annual fee, then putting your investments into a canned model and forgetting about it until the next year. And they aren’t working with a broker-dealer, selling financial products to meet quotas and make commissions.

Instead, they become a fiduciary, acting on behalf of their clients, whose interests they put ahead of their own. As a fiduciary, their duty is to preserve good faith and trust. They build and maintain client portfolios, rather than matching them to their firm’s products. For this, they earn between .5% and 3% of a client’s portfolio value each year. At NEST, our fee is 1%, which is the most common. 

Because they’re incentivized on the growth of the account, they are on the same side of the table with clients. That means you win and lose together. They’re certainly motivated to make sure you both win.

 

Are Financial Advisors Worth the Cost?

The cost of hiring a financial advisor really depends on how they charge for their services — and how effective they are.

Here’s where we have to differentiate between value and cost. Yes, have to pay for your advisor’s services, either up front or as a percentage of your portfolio value. And the better returns they get for you, the more you’re going to pay. According to a Vanguard study published in 2019, working with a skilled financial advisor can add about 3% in net returns.

The difference is certainly worth the percentage fee.

But a good financial advisor’s value isn’t only in the money they can help you make — it is also in the costly mistakes they prevent you from making, from poor investments to inadequate retirement planning, to not having an estate plan. 

So, when considering whether to employ a financial advisor, think less about the cost, and more about their value. 

A good financial advisor is worth their weight in gold.

 

What does it cost to work with NEST’s Financial Advisors?

At NEST, we work primarily on a percentage fee-based model. This means our 1% annual fees are directly correlated with your portfolio’s performance. 

You do well, we do well. 

The exception to this is our initial financial planning services. We charge a $5,000 flat fee to build a customized plan for your needs and goals. This involves around 20 hours of work and includes cash flow analysis, investment portfolio analysis, retirement planning, estate planning, insurance coverage analysis, investment tax planning, and professional referrals to CPAs and/or attorneys.

Our financial planning services are open to anyone.

NEST is an Austin-based, boutique financial firm, and we want to stay that way. We love working with Austin and Central Texas businesses, families, individuals, and entrepreneurs toward your financial goals. 

We actively manage our clients’ investment accounts daily using a data-driven approach. In order to offer that level of attention, we require a minimum of $250,000 for our investment management services. 

To see if you’d be a good fit for NEST’s financial advising and portfolio management services,  why not schedule a no-obligation call with us?

 

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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.