Advice-only financial planning is when clients don’t have the obligation, expectation or even the option to have their investments managed. It is for people who want to make their own financial decisions, albeit with the guidance of an expert.
People generally seek advice-only financial planning because they:
- enjoy managing investments themselves,
- understand the impact of costs and don’t wish to pay for asset management,
- don’t trust any asset manager enough to hand over their life savings or
- have had bad experiences with asset managers
The advice-only financial planning model lets DIY investors cost-effectively engage financial professionals, paying for the knowledge of a professional but not that professional’s ability to place trade orders.
With this approach, clients save a small fortune over their lifetimes—given the compounding impact of fees on portfolio investment returns.
With a 1% fee, for example, an investor starting with $1 million could pay their asset manager $1 million over 22 years. This would reduce the initial investment’s growth by 1/5th.
Other Advantages of Advice-Only Professional Assistance
- No conflict of interest. Most financial advisors are paid either from commissions earned on the sale of products, or based on a percentage of assets under management. It's not uncommon for this percentage to be around 1%.
This can lead to conflicts of interest for the financial planner—should they recommend the investment that earns them the highest commission, or the one that will best fit the investor’s needs?
An advice-only planner is unbiased; they make the same amount of money whatever vehicles you invest in. They focus on the needs of the client.
For example, if the client wants to invest in property or buildings, the traditional planner might discourage that move, because they will make nothing on it.
The advice-only planner will make their (usually lower) fee no matter what investment path you choose.
- You understand your investments. With advice-only investing, you implement your financial plan yourself. You learn the ins and outs of investing, and can teach your children and grandchildren, leaving a legacy of financial literacy.
- Transparency. Advice-only financial planning is totally transparent; you know the whole story of what is happening with your money.
Who Uses Advice-Only Planning?
Anyone can, but most investors fall into one of these categories:
- First-time investors who wish to learn how to invest windfall income.
- Seasoned DIYers who want support applying their low-cost approach.
- Future DIYers seeking help transitioning to self-management.
Advice-only planners provide simple model portfolios—typically a handful of low-cost index funds—that DIYers can manage themselves.
For maximum simplicity, a single-fund solution (such as a balanced fund) also works. For those not interested in managing their money, advice-only planners can review low-cost options for professional portfolio management.
DIYers understand that financial planning is more complicated than investing. Many families approach financial planners seeking not just a second opinion on their investment portfolios, but also answers to more difficult questions around retirement and taxes.
Advice-only planners spend more time on financial planning topics than on investing. They need to cover areas that many DIYers miss, such as umbrella insurance coverage and estate planning. Those are critical elements of any financial plan that even the most perfect asset allocation cannot solve.
Know What You are Paying For
Before you start working with a financial planner, make sure you understand how they are paid, and what you are paying for.
Some advice-only planners charge hourly for advice as needed; others charge a recurring retainer for ongoing advice. They might charge a one-time, flat fee for the initial engagement, then hourly if a family needs further help.
This content is developed from sources believed to be providing accurate information, and provided by Kelly Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.