Navigating the Retirement Risk Zone

In today's video, I'm going to do my best to address what might be the most frequently asked question when hiring a financial adviser. How much should I pay? I'm a certified financial planner and the owner of an independent financial planning firm. And every year, we help retirees build robust retirement plans that match their life goals. Despite the fact that I myself am a financial adviser and therefore am undoubtedly biased in today's evaluation, I believe there are many routes to financial and retirement success.

And many of those routes don't actually require hiring a paid professional financial adviser. But if you are in the position where you may want the help of a paid professional, it can be a truly daunting task to understand if you're getting the value that you're paying for. So in this video, not only are we going to walk through how to identify whether or not you should hire a professional paid financial adviser, we're also going to compare and explain the different fee structures within which financial advice can be obtained. So I believe no one comes out of the womb with an understanding of money, investing, taxes, or retirement withdrawal strategies. As a result, everyone watching this video has a financial adviser whether or not they think they do.

If If you're building your own financial plan and executing your own investment strategy, then at the very least you are your own adviser. And maybe you even have some other advisers like myself who you watch on YouTube or read advice from on the Boglehead forum or whatever. Those could also be considered your advisors. Maybe you just pay for a professional financial advisor. Now in all of those scenarios, those financial advisors are getting paid whether there is a clear transfer of dollars or not.

And in some of those scenarios, it's clearer than others. For instance, the cost of hiring a professional adviser might come in the form of a percentage of assets fee, an hourly fee, maybe a flat fee, something that's more numerically defined and can be quantified in advance. And in the case of being your own adviser, the cost might be said to be the cost of mistakes made or opportunities missed or the time spent doing research instead of being with your kids and grandkids or even the opportunity cost of not giving yourself permission to spend your wealth, all of which are significantly less clear and harder to quantify in advance. And in the case of getting financial advice off of the Internet, that cost is often the least clear in my opinion as what we're really doing is taking in information that influences our decisions often without sufficient context to know if it is truly relevant to our unique specific situation and all the while not being entirely certain what the motives of the giver of that advice are. So having said all that, in my opinion, it's totally fine to be your own financial adviser as long as you understand the trade offs and are comfortable with those.

Now this video is about the decision making process when hiring a financial adviser. There is, of course, free content out there that you can use to plan your retirement. And if you wanna see how I run through my retirement planning process completely free of charge, you can click the link in the description to this video. But for the rest of this video, I'm going to clarify and explain the 4 most common fee structures that professional financial advisers work within. I'll also explain what paid financial advice should actually produce, and then I'll share my thoughts on who those different fee structures might be the best fit for based on the type of advice and the preferences that someone might have.

The first and simplest fee structure to both explain and then toss in the trash is the commission based fee structure. It's pretty straightforward. The adviser pitches a product. They get paid for how many units of that product they sell. Therefore, they are incentivized to put blinders on their customers and convince them to buy a specific thing even if they mere there may be better alternatives available to them on the market.

This is a terrible fee structure within to get financial advice. It is, however, a fine fee structure within which to buy a product that you may already know that you need. For example, when you need to buy a car, you're not upset that the salesperson is making money off of the transaction. After all, you need the car. So the same is true in retirement planning.

And the most obvious examples here would be life insurance or annuities. Now I could make a fair case for both products within a responsible financial plan. However, the person building the financial plan should never be involved in the sale of those products. And the person selling those products should never be responsible for building the financial plan. That is exactly how we handle that type of arrangement here at Peak Financial Planning.

We're not insurance licensed nor we nor do we sell any products whatsoever. But we may still recommend insurance or annuity products to the right client in the right situation, always ensuring that we do not have a financial incentive to recommend or not recommend that product to a client. The second key structure would be an hourly fee structure. In this case, the adviser advertises and charges an hourly rate. In this case, let's say $300 per hour.

The adviser tracks their time, sends you a bill for the time spent. At the end, you receive your advice. The adviser receives their fees. And if you have a clear idea of the problems you are trying to solve and can estimate clearly in advance how much time that might take and how much economic benefit you might get out of the fees you pay, then this can be a good working scenario. For instance, say you're extremely confident with your portfolio management and your withdrawal strategy, but you know you could use some advice on whether to and how much Roth conversions to perform this year.

You are confident that this should only take 2 hours of the adviser's time because you are only addressing that one variable, and you believe that the financial benefit of that advice would be in excess of the $600 in fees. Now where this fee arrangement can go terribly wrong in my opinion is that it is extremely transactional and produces bad incentives for both parties, the client and the adviser. The client has an incentive to minimize the adviser's time spent on the project in order to minimize their cost, and the adviser has an incentive to maximize their time spent on the project in order to maximize their profit. These things obviously work against each other, and they often lead to poor advice outcomes. Maybe the client in this case does not provide as much detail or context as would be optimal for the adviser to provide great advice.

Or maybe the adviser draws out the scope of the project in such a way that it erodes the client's trust as the client asks themselves, is this project really that broad and is that information the advisor asked for really relevant? Or are they just milking me for fees? I see this dynamic happen really frequently in the tax world. Tax work is notoriously hard to understand for most consumers. The tax code is incredibly complicated.

It's very hard to predict with accuracy what you may owe or what can be done by the CPA to help you save on taxes. And in addition, most CPAs bills are sent after the completion of work. So often, the client doesn't even know how many hours the project took. Suddenly, one day, you, the client, receive a bill for work done. You're stunned and frustrated by the cost and ultimately become skeptical of the trustworthiness of the relationship.

Now in that example, it's not clear who's wrong, the CPA or the client. And unfortunately, neither party will really be able to identify who was at fault if there was any at all. It's entirely possible that the fee was exactly perfect for the project and the outcome the client got provided financial benefits far in excess of the fee. But because the fee wasn't clear from the very beginning and there were opposing financial incentives from both parties, the hourly fee model presents too many dangers in my opinion. So for that reason at Peak Financial Planning, we don't offer or advertise an hourly rate at all.

I believe that the potential for bad outcomes and broken trust is just too high to be worth it. This leads us to the 3rd fee structure which is a flat fee arrangement. In a flat fee arrangement, the financial adviser charges a predetermined set fee regardless of complexity or circumstance. In exchange for that fee, the adviser promises to deliver a specific set of outcomes or a specific outcome. And the client has an incentive to provide as much detail and context as possible to the adviser because there's no additional cost for more time spent.

And the adviser has an incentive to specialize in a specific area of focus because doing so will allow them to accurately estimate their cost to deliver advice within that flat fee and still make a profit. And the client gets better advice outcomes because not only will they provide enough context and detail, but they are also more likely to receive uniquely expert advice as a result of the adviser's specialization and narrower professional focus. The danger here is to make sure that the area of expertise that you as a consumer need is aligned with the expertise the flat fee adviser actually has. Which leads us now to the 4th and final fee arrangement, which is the assets under management or percentage of assets fee. Say an adviser charges a 1% assets under management fee and manages investments that total $1,000,000 for a client.

That client would pay $10,000 per year for the adviser's services. Now this sounds like a lot and that is because it is, which is why an assets under management or AUM relationship isn't for everyone. Structured properly, an AUM relationship is similar to that of a concierge doctor. In exchange for a premium fee, the client should receive unlimited access to their adviser as well as a comprehensive suite of expert services including financial planning, investment management, retirement planning, tax planning, portfolio rebalancing, estate planning, and probably some other things. The scaling of the AUM fee or that asset management fee incentivizes the adviser to perform their best work because both the client and the adviser share in the risk and the reward.

And ideally structured, that concierge system and scaling fee also acts as an incentive for that adviser not to overload themselves with too many clients to the point where quality of work and service decrease. Now unfortunately, it is often unclear when and for which advisors, services, and AUM fee is worthwhile which is why it requires particularly rigorous screening. At the end of the day, we get what we pay for. If you are an expert mechanic, it can make sense to go chase down the cheapest car because you can identify whether that car is being bought at great value and you have the skill to repair it if it breaks down. But if you are not an expert mechanic, chances are that if you buy the cheapest car, you'll probably have the most problems.

The same is true when it comes to financial advice. If you are proficient, skilled, and love to learn about inflation, investment markets, retirement withdrawal strategies, and tax advantaged accounts, then lower cost financial advice of a more transactional nature may be a great option for you. If you are not as proficient or maybe you'd rather spend time in the garden or with your grandkids than reading studies about guardrail withdrawal strategies, then it's likely that higher cost, more trust based financial advice is the right option for you. Now neither option is better or worse. It's about identifying the right option for you and then finding someone you can trust to deliver that option.

So personally, at Peak Financial Planning, I believe that a concierge style flat fee arrangement with an optional assets under management option is the best fee arrangement. That annual flat fee financial planning arrangement allows us to build unbiased financial plans without limitation on the time we spend with clients. That flat fee also ensures that we have been compensated for the work we do for clients and does not create a malincentive so that clients are required to establish an assets under management relationship with us in order to actually obtain the advice they're searching for. On top of that, because we will be paid for our financial planning efforts, we are not incentivized to rush or deliver intentionally fear based financial plans that encourage asset management relationships. That annual flat fee also allows us to predict and manage client loads so that we do not overload ourselves by promising our services to more clients than we can practically manage.

The annual flat fee also provides predictability of certainty to our clients. They know what they will pay and what they will receive in exchange for that fee. Now we also offer optional assets under management relationships to clients who have gone through our rigorous financial planning process if they want to delegate that activity. And if you feel anxiety, uncertainty, or fear of making mistakes with possibly your most valuable asset, then I believe it maybe makes sense to consider delegating the portfolio management. And if maybe if one partner in a spousal relationship is the financial driver and the other partner is a financial passenger, then delegating financial planning and asset management can act as a form of insurance for the financial passenger who is the more vulnerable partner.

Specifically, what I'm referring to is many partnerships have one partner who is the main source of the financial plan and financial information. And the spouse, the wife, or the husband is often a part participating but not actually constructing or dealing with it on a day to day basis. And the financial passenger, in that case, the more passive, you know, more vulnerable partner, can be left with a delicate house of cards that they are unequipped to balance and should the should the financial driver pass. In that scenario, maybe paying an ongoing retainer or asset management fee may feel like a bargain compared to learning how to manage a complicated financial system that is suddenly inherited due to the passing of a spouse. And the challenge there is oftentimes you don't wanna wait until one spouse passes because now the financial plan has never been documented or downloaded.

And what you're doing is you're picking up a broken house of cards rather than reinforcing an existing house of cards. So I personally crafted the business model at Peak Financial Planning intentionally so that I can become an expert in a specific area of focus. In our case, how to navigate the retirement risk zone. And also so that I can limit the number of clients I have to take so as not to overreach and to provide world class financial advice and investment management that helps individuals and couples who have saved diligently and are being scared out of spending their wealth to confidently retire and provide great meaning to themselves, their families, and their communities with the wealth that they've sacrificed so much to achieve. Ultimately, it really is a very personal decision to decide whether you need paid advice, what type of advice you need, and what fee structure is appropriate for you, and to find an adviser that then matches that.

So with all that said, hopefully, you found this video helpful. If you would like to learn more about how we at Peak Financial Planning help our clients retire confidently, you can visit our website at www.thepeakfp.com. As always, thank you for your time and attention, and see you in the next video.