Why You Should Consider "Advice-Only" Financial Advice (and Why Momentum Charges a Flat Annual Fee)
My goal at Momentum is to help DIY early/mid career professionals get started right with their finances.
My goal at Momentum is to help DIY early career professionals get started right with their finances.
Almost by definition, this means that my clients may not have the assets for an “Assets Under Management”, or “AUM”, fee to make sense.
I want to support and be with my clients through all of those first life events that are just so prevalent in your 20s and 30s - starting your first job, finding a partner and possibly merging finances, paying off student loans, switching jobs, going back to school, moving states, navigating your employee stock options and/or (just maybe!) a liquidity event, having a baby, and not to mention the travel and attending the many weddings often required of this age (one client had over 5 in just one year, goodness!). There are just so many life events happening during this time period, and they all have rather large financial implications for both now and the rest of life!
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Getting these events and decisions right now will have large positive impacts down the road, and just set yourself up for success So Much. And I want to support my clients through all of these life events <3
Now while some early career professionals may be earning decent salaries, they are often still saving, paying down debt, and trying to put in all the hard work that will start to build their wealth over time. Unfortunately, the financial planning industry has historically largely written off those at this life stage without enough money to pay for advice on AUM, and they are often left to rely on random snippets from TikTok, random articles on the internet, or just whatever (well-intentioned, but uninformed or outdated) information from family and friends. This information may or may not address the nuances of their situation, may be from sketchy, untrustworthy sources, and/or just may be plain wrong. The activation energy to think about finances is already high, let alone to try to search for a financial planner or coach that could help you holistically and give solid advice based on your individual situation.
All this to say, that I just can’t leave anyone to try to figure it out on their own and hope that they one day make it to have enough money to hire a planner on AUM!
Now, AUM planners are great, and they do great financial planning for a lot of great people, and that’s awesome. No arguments there.
AUM = “Assets Under Management” and is exactly what it sounds like. When you pay an advisor based on AUM, you pay them a % of the assets that they manage for you. This means when you hire them, you transfer any brokerage accounts and IRAs over to them and they manage those accounts for you. This model works for many reasons: it’s sticky, and you are theoretically paying for the value that the advisor is directly providing by managing those investments, which is an improvement on paying a financial person via commission (in theory, as the investments go up, the fees go up, which aligns the advisor’s incentives with the client’s - more on this later). However, this model:
Leaves out many, many people from being able to access quality financial advice
Does not align client value as closely with advisor incentive (and actually has some overlooked conflicts of interest)
Is just plain expensive, and it’s not always clear or prevalent how much a client is actually paying for the service
First, the AUM model relies on a client having assets. It completely leaves out those that
1) are comfortable (or could be, with some guidance) managing their own investments, but still want comprehensive financial guidance (because financial guidance is about SO MUCH MORE than just investing). Once the investments are set up, it often only takes a few hours per year of time to manage your own investments, depending on how deep you want to dive.
2) don’t have these assets for that advisor to manage in the first place. And this is pretty likely because many firms have at least $1M minimums, if not higher, while the median net worth of 35-44 year olds is $91,300 (as of 2019) and less than 35 year olds $13,900. (Source: Federal Reserve).
I struggle here, not because those that have enough assets for the AUM model don’t need help because they do, but because the two categories of people above are just such a broad swath of the population. Goodness!
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Regarding the second point, the AUM model both
1) propagates the mistaken idea that the value in an advisor-client relationship is solely in the investment management piece, and ignores comprehensive financial planning guidance, and
2) creates some more subtle potential conflicts of interest regarding the client’s whole financial life and goals.
While investment management can be a fantastic value-add for a client, being paid solely on this basis ignores the potentially HUGE value that comprehensive financial planning advice offers. Helping a client to save for their goals, review their tax returns, plan and optimize their taxes, understand and make the right decisions around their stock compensation, assess their risk management plans, reduce their spending and manage cash flow, plan for retirement with the proper accounts, and just getting organized to move forward is really where much of the “work” in financial planning actually lies, not to mention how to change all of that as a client’s own life and goals change (like getting married, starting a business, going back to school or taking a sabbatical, etc).
There are also conflicts of interest that I don’t like with the AUM model. In theory, the advisor’s fee goes up automatically as the client’s investments hopefully go up, and that sounds reasonable, except that…the client might sometimes want to spend the money! If a client wants to spend some money for a house, wedding, sabbatical, etc down the road, that is likely technically going to come out of the advisor’s fee (because they would slowly be moving money out of the investments and into cash for spending) and could create a conflict of interest. In addition, when a client has an old employer 401(k), the advisor is incentivized to encourage the client to roll it over into an IRA (which is likely a perfectly fine option) without considering rolling it over into the client’s new 401(k), even though that might also be a perfectly reasonable option with even one fewer account to keep track of.
Finally, the third point above is just how expensive AUM is for you the client. While this approach is extremely sticky for the advisor (the process of the paperwork to transfer everything can be tedious and cumbersome), it often obscures the true amount that you are paying your advisor over time.
Let’s say that you come to an advisor with $1M, and he charges 1%.
You pay this 1% EVERY year, and let’s say your investments on average grow by 5% each year.
You’re going to pay just over $1M in fees alone over the course of, say, 30 years with this advisor!
This results in your $1M only growing to $3.2M vs $4.3M you could have otherwise had! (Note: For simplicity, I’m assuming no contributions or withdrawals. You can play with a great calculator for this here.
Now, let’s compare that with an annual subscription model paid monthly.
Even if you paid $10,000 each year (or $833 each month), you would only pay $300,000 over the same 30 year period.
That is a difference of more than $700,000!
How an example AUM fee compares to a subscription fee.
Assuming that you are able to obtain similar value from each advisor, why would you not go with the subscription model?!
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These reasons are exactly why Momentum is what’s called “advice-only”, meaning that Momentum provides comprehensive financial advice without any of the actual investment management services (although I absolutely advise and guide you on your investments), and why Momentum charges a flat subscription fee instead. I believe that this model is the most fair and value-add way to service my early- to mid-career clients that are working their way to wealth.
Ready for someone to help guide you in setting up for financial success? Schedule a free intro chat or sign up for the You Are Your CFO: Comprehensive Early Career Personal Finance course!
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