Benefits of fee-only, financial planning services for small business owners
The purpose of this post is not to start a debate on what model is "right or wrong," but to share why I think the fee-only, financial planning service model provides the highest level of clarity and fairness to my small business owner clients (my firm, Lasting Wealth Principles uses a flat fee structure). I note three reasons below that include transparency, objectivity, and advancing the financial planning profession.
Transparency
Within the fee-only, financial planning service model, there are several payment options that include flat-fee, retainer, hourly rate, and percentage of investment assets being managed. Regardless of the payment option used, a fee-only financial planner does not receive any form of compensation from anyone other than the client (i.e., does not receive commissions from any third party). With the client knowing that he or she is the only person paying the fee-only planner, it provides a level of clarity. The small business owner can be confident that they are working with a financial planner and not a financial product salesperson.
Objectivity
There is no such thing as a business model that has no conflicts of interests, but the fee-only structure has fewer of them compared to other models. Fee-only financial planners do not sell financial products to clients for commission meaning clients' fees are not tied to the sale of a product. Since a fee-only planner has no incentive to sell any specific financial product, small business owner clients are more likely to receive more objective financial advice and recommendations. I illustrate with a hypothetical example below.
George and Jane are the owners of a local restaurant who are looking for objective financial advice for their personal and business finances. They recently hired Mike who is a fee-only financial planner. They will pay Mike a flat quarterly fee for financial advice and recommendations across their entire financial plan. George and Jane got married five years ago and just had their first child. During their life insurance planning meeting, Mike recommended that George and Jane each purchase $2 million of term life insurance, which would help support their child and provide liquidity for their business in the event of one (or both) of them dying prematurely. Since Mike is getting paid for his advice to them and has no financial incentive to sell them life insurance (i.e., a financial product), they know that the recommendation is objective, and in their best interest. Even further, Mike helped George and Jane find the most optimal life insurance products that were best for their situation.
Advancing the financial planning profession
“Small business owner clients get more value.”
The history of the financial services industry has shown that it started with a focus on the sale of financial products. There has been much progress in this area over the years, as more financial professionals are focusing on providing advice to clients, but there is still a long way to go before financial planning is acknowledged as a "true profession" by the public. With a focus on providing advice to clients instead of just selling financial products, fee-only financial planners are likely to be competent and focus on continually learning. As fee-only planners gain more knowledge, small business owner clients get more value, and the public will start viewing financial planning more as a profession.
Differences within fee-only financial planning
One hurdle that has limited access to certain people getting financial advice is that some financial advisors' fee-only structures are strictly based on the value of a client’s investment portfolio (advisor has an account minimum). For example, a firm might require all clients to invest a certain asset minimum (e.g., $250k, $500k, or $1 million) with them. The advisor then charges the client a percentage (somewhere around 1%) of these assets. There is nothing wrong with this type of fee-only structure, but it can exclude certain small business owners who earn a high income, but do not have the required investable asset amount available at this time. Thankfully, the financial planning profession has progressed and there are plenty of advisors offering flat fee for advice models that are not based on the balance of a client’s investment accounts. This can be an opportunity for certain small business owners to start getting financial planning, which can lead to a more secure financial future for their family and business. I illustrate with a hypothetical example below.
Harry is a sole proprietor and recently got married to Lisa. Their combined household income is approximately $350,000. They both have saved well, but do not have the required asset minimum in place to become clients at certain firms. Instead, Harry and Lisa found an advisor who has a model that charges a flat quarterly fee for financial planning service. They have adequate income to comfortably pay this fee going forward and are aware that they have areas in their life (personal and business) where financial advice is needed. The couple decides to move forward and hires this advisor.