Paying For Financial Advice: Fee-for-service vs. Concierge Financial Planning

Financial advice, just like medical advice, is not cheap.

There are several different models when paying for financial advice. In many ways, these models are analogous to the different payment models in healthcare. Understanding the similarities can guide how you’d like to pay your financial advisor, should you choose to hire one.

Financial Advising Fee Structures

There are four major ways that financial advisers charge for their services:

Commission-based sales: In this model, the financial advisor is paid for selling financial services or products to you.

Assets under management: With this fee structure, the financial adviser charges a percentage of assets under management as their fee for providing financial and investment advice.

Flat fee (retainer): This is an increasingly common fee structure. Rather than charging a percentage of a client’s portfolio, in this model, a flat fee is charged for advisory services.

Hourly rate: In this model, you pay your financial advisor by the hour for his or her services. If your financial life is simple, then you won’t pay much. However, if your financial situation is complex, the advisory fees could pile up in this model.

There are pros and cons to each advisory model. No matter how you choose to pay your financial adviser, there will always be conflicts of interest. The only way you can fully eliminate conflicts of interests is to do it yourself, although sometimes you can’t fully see your own weaknesses and cognitive biases.

Comparing how we pay for medical advice with how we pay for financial advice

In many ways, paying for financial advice is similar to how we pay for medical care:

Fee-for-service

This is the healthcare payment model that most physicians are familiar with. For every service you perform, you charge the insurance company, who pays you for your work. For every office visit, you get paid. For every procedure you do, you get paid. In this compensation model, the more patients you see and the more procedures you do, the higher your pay (and the longer your hours).

The hourly-rate model in financial advising is similar to the healthcare fee-for-service model. You only pay for services rendered. The more financial services you need, the more you pay. But if you don’t need much financial advice, you may pay less in the hourly rate model than in other models.

Concierge medicine

A popular, emerging model in healthcare is concierge medicine. Primarily designed for the primary care setting, a patient pays a fixed cost (either monthly or annually) to their physician, and they receive unlimited doctor visits. Some concierge physicians (at least on television) even provide house calls. Other services (lab, x-ray, etc.) may cost extra, but the idea of concierge medicine is that instead of rushed, 10-minute visits, a patient would get unlimited time with their doctor.

The concierge model in financial advising is the flat-rate or assets under management model. You get unlimited advice from your financial advisor.

One wrinkle to the assets under management model is that the amount of fees you pay goes up as your assets grow. Presumably, your assets will rise as you get older, and you’ll pay more for financial advice.

Using the concierge model analogy, this would be like charging patients based on how old they are. The older you are, the more health problems you have accumulated, and your concierge fee would be higher. Instead of assets under management, concierge medicine practices would charge for more “health problems under management,” with age as a surrogate for comorbidities. This model is actually being utilized at some concierge medicine clinics.

There is no ethical analogous healthcare model to the commission-based sales model for financial advice. No patient should see a doctor who is getting paid by pharmaceutical companies for each drug they prescribe.

Which model is best?

There is not necessarily a better fee model for financial advice. Some might find an hourly-rate fee-for-service model fits their needs, while others might think the concierge AUM model is better.

In medicine, healthy people would gravitate towards a fee-for-service model because they don’t utilize healthcare unless they have a medical emergency. Patients with a lot of comorbidities and health problems would get better value from a concierge model where they get unlimited doctor visits for a single price.

From the perspective of the financial advisor, the concierge model (i.e. AUM model) is much preferred. This is likely because the payment per hour of work can be much higher in this model than in the hourly-rate (fee-for-service) model. However, if the percentage of assets charged by financial advisors declined enough, then it might actually end up becoming profitable for financial advisors to move to an hourly rate (fee-for-service) model.

Doctors, from a quality-of-life perspective, tend to gravitate to the concierge model. If it is financially feasible, I think that most physicians would want to spend more time with patients. Those that have been able to make the switch to the concierge model can make the same amount of money (or more) without seeing as many patients. This is because there are potentially some patients who pay the high concierge medicine fee but only see the doctor one or two times a year for emergencies.

One of the big challenges of building a concierge medicine practice is finding the patients who are willing to pay extra money (outside of insurance) for the perks and services that concierge medicine provides. In the financial advisor world, a lot of time and money is spent cold-calling and schmoozing “prospects” to convince them to pay high fees to manage their money.

Conclusion

Financial advising fee structures and healthcare payment models are remarkably analogous. Financial advisors, like doctors, generally prefer the concierge model for the services they provide.

The model that gives clients the best value is highly dependent on the complexity of their financial situation. For investors with simple financial lives, the hourly rate (fee-for-service) model likely provides better value. On the other hand, clients with complex financial situations might get better value from a flat rate or assets under management (concierge) model.

What do you think? Physicians, would you rather work in a fee-for-service or concierge medicine model? Do you think that hourly-rate or assets-under-management fee models provide better value to clients?