The purpose of this article is to give you a very basic primer on what advice-only financial planning is and how it differs, specifically in its billing and handling of investments, from other types of planning and advising. Stay tuned this summer for more in depth articles on many of the topics you’ll read about in this intro!
First, a quick distinction between financial planning and investment advising. Financial planning takes a broad look at the key elements of your personal financial landscape and integrates this information to help you make informed decisions about how to best use your resources. For those of us that are CFP® professionals we are encouraged to look at the following areas, assuming the client agrees to explore each area:
Goals
Cash Flow
Retirement
Investments
Education
Taxes
Estate Planning
Insurance
In another article I will address each of these areas and the typical 7-step process a CFP® professional will take you through (and I’ll tell you more about my additional category which is mindset).
Investment advising typically focuses just on your investments. And while investments are critical to building your wealth, a focus exclusively on their performance without review of the categories listed above, provides you with an incomplete picture of your financial landscape.
Start to know the difference between who wants to manage your investments and who wants to help you navigate the broader financial landscape known as financial planning. They are not the same thing.
For now I want to focus on a very specific type of financial planning that has emerged in recent years: advice-only planning. Advice-only financial planning arose out of a demand for access to financial advice for those who did not meet the typical minimum assets needed to work with many advisory firms. This type of fee arrangement is known as assets under management (AUM). The way an AUM advisor is compensated is based on a percentage of the assets held under their management and is typically about 1%. So if you have $500,000 in investable assets managed by an AUM firm (a common minimum needed to engage in planning), you will pay them $5,000 a year to manage those assets (sometimes there’s not even a financial plan associated with this cost – that fee is for managing your investments).
Often the advisors who charge for services under this model have a minimum amount of assets they require clients to have before they’ll work with them. Whether or not this is the “right” way to charge for financial advice is beyond the scope of this article, but it is important to have a basic understanding of it in order to understand the evolution of advice-only planning.
There are many people who do not yet have assets accumulated at a level that would allow them to work with an AUM advisor, but would appreciate the guidance of a financial professional in learning how to create a healthy financial landscape and start to build wealth. Additionally, in the accumulation years, many people’s investable assets are held in workplace retirement accounts like a 401(k) and cannot be rolled over into an AUM advisors control, thus continuing the reasons why many are disqualified from working with AUM advisors and gaining access to the financial advice they could benefit from.
Then there is a growing pool of folks who see themselves as DIYers. Many come from the FI or FIRE (Financial Independence Retire Early) community. They are comfortable opening investment accounts at the custodian of their choice and have learned how to buy and sell stocks and bonds to fit their investment philosophy. However, since investments make up just a tiny fraction of a person’s financial landscape, these DIYers also appreciate the guidance of a financial planner to look at their overall plan, to include investment allocation.
Then there are the hybrid-DIYers who are willing to do some of the work themselves when it comes to investments, but they don’t want to learn how to do it all alone. I find the hybrid-DIYers delightful to work with! They tend to be open, curious and determined to find their FI!
Enter an advice-only financial planner … like me!
When you hire an advice-only financial planner you are paying a fee for their advice on your financial landscape. There is no incentive for an advice-only planner to encourage you to roll assets into their management because by definition and regulations we do not have custody or discretion over any client funds (I can’t see your accounts on your custodian’s platform nor can I trade anything within your accounts – I have zero access). Therefore they are not compensated via AUM fees. They do not sell any products or receive any commissions (this also makes them a fee-only advisor). Their job is to give you their professional opinion on where you currently stand financially and what changes you may want to consider, if any! It doesn’t matter what your net worth is or how much you have in investable assets – advice-only planners charge a fee for their service. Sometimes that will be hourly and sometimes it will be a flat fee. So if you can afford their fees, you can get financial advice!
Who is the best fit for an advice-only planner?
Someone who appreciates collaboration and engagement and is willing to do the legwork of monitoring their investments. If your preference is to be as hands-off as possible with your investments and overall financial plan, an advice-only planner is not the right fit for you.
People who believe in low-cost simple investing are also often good candidates for advice-only planning. While not all advice-only planners will subscribe to a basic 3-fund portfolio (think Vanguard and the Bogleheads community here), many do. I am one of them. If you are looking for an advisor who will help you pick individual stocks or complicated investments, this isn’t the right place for you.
Most clients of advice-only planning value simplicity – they are looking to be true long-term investors, not short-term traders. Therefore their investment portfolio does not need to be tinkered with on a routine basis. They add money to their accounts, invest in their basic funds, and rebalance once, maybe twice, a year. Perhaps most importantly, they recognize that their investments are not the entirety of their financial landscape and want the guidance of a professional to navigate the remaining areas of financial wellness to ensure they’re on track to reach their goals.
Advice-only planners know that a product is not a plan. Your insurance policy, your investment account, an annuity you purchased … none of these products in and of themselves constitute a financial plan. They are stand-alone products that may or may not add value to where you’re headed in life. Advice-only planners take a step back and look at all the areas that touch your financial landscape. They are not just investment advisors and they don’t believe that a focus on investments to the exclusion of all the other important areas will get you where you want to go.
Stay tuned for more articles on this area of planning. I’m constantly surprised by how many people are not familiar with this model of planning – to include those in the industry! This summer I will focus my writing on educating you about the various methods of planning and how advisors are compensated for their work. That way you can choose what works best for you!
