[Editor's Note: The following guest post was submitted by Ryan Kelly, CFP, of RFK Capital Management. His firm recently transitioned from “fee-only” to an “advice-only” financial planning model. In this post, Ryan refers to Harry Sit, who I recently interviewed for the podcast (episode to run in February) and who will be speaking at WCICON20. Ryan is now an advertiser with us, one of our recommended financial advisors.]

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There are three main types of financial advice models:

  1. Commission
  2. Commission and fee
  3. Fee-only

More than 99.9% of financial advisors fit in one of these three models. There is wide consensus among the White Coat Investor community that fee-only is the best, least-conflicted model for receiving financial advice.


What Is The Financial Advice Only Model?

There is a fourth, lesser-known model that I believe deserves more attention among the White Coat Investor community. The model is called advice-only and is practiced by less than 0.1% of financial advisors. I recently transitioned my firm to advice-only and have studied this model for the past six months. Here are seven things I have learned about the advice-only model.


#1 Advice-Only Goes Beyond Fee-Only

Harry Sit, the author of The Finance Buff  blog, has offered what I believe is the best definition of the advice-only model. You can find his definition here.

As Harry explains, a fee-only advisor and an advice-only advisor share the following characteristics:

  • The advisor’s firm is a Registered Investment Adviser (RIA) registered with the SEC or at the state level.
  • The advisor acts as a fiduciary and puts your interest first.
  • The advisor has Certified Financial Planner (CFP®) certification, other professional credentials, or qualifying experience.
  • The advisor does NOT sell products that pay the advisor a commission (cash-value life insurance, annuities, load funds, individual muni bonds, non-traded REITS, limited partnerships, etc).
  • Advice-only goes above and beyond fee-only by adding:
  • The advisor does NOT up-sell you on managing your money for a recurring fee either as a percentage of your asset value or on a monthly or annual retainer.
  • The advisor does NOT, for a kickback or markup, refer you to someone else who will manage your money for a recurring fee. Recommending unaffiliated financial institutions is OK.
  • The advisor strictly offers his or her advice for a fee. The advisor treats you as a competent adult able to follow the advice. Assistance in opening accounts or filling out forms is OK. Accepting prepayment for follow-ups or incidental questions that come up is OK.

To put it simply, advice-only means no commissions and no management of assets.


#2 Ongoing Investment Management Is a Highly Profitable Business

To understand the uniqueness of advice-only, it’s important to first understand that fee-only advisors become most profitable through the management of assets, not the giving of advice. Managing assets is the holy grail to the fee-only advisor for three reasons.

  1. It provides a future stream of recurring fee revenue.
  2. Fees can be deducted automatically from the client’s investment accounts—the “out of sight, out of mind” feature means most clients don’t understand the fee accrual over time, and how those fees are impacting long-term investment returns.
  3. Many ongoing investment management clients perceive there are high switching costs associated with moving their investment accounts and making a change in investment advisor. I’ve heard fee-only advisors describe their book of business as “sticky money”.


advice only financial planning

Ryan Kelly, CFP

#3 Advice-Only Advisors Draw a Clear Line Between Advice and Investment Management and Stay on the Advice Side

An advice-only advisor does not sell products for commissions AND does not offer an ongoing investment management service. If you look up an advice-only advisor’s ADV 1 and ADV 2, you will see the advisor does not earn commissions AND reports $0 in assets under management.

Why does an advice-only advisor choose to not offer ongoing investment management? Advice-only advisors feel the ongoing management of money is where superfluous fees grow on fertile ground, where transparency fades into darkness, and where unnecessary complexity multiplies.

They believe the advice-only model is a structural solution to minimizing potential conflicts of interest. It liberates them to focus on just giving advice and to promote self-reliance among their clients. Some have worked previously under both a commission model and a fee-only model.

Under the commission model, the advisor felt like a salesperson. Under the fee-only model, the advisor initially felt like an advisor but eventually felt like an asset gatherer or investment manager. Under the advice-only model, the advisor feels like an advisor.

A fee-only advisor who has assets under management and also offers hourly work has not drawn this hard line between advice and investment management. There’s an important difference between offering advice-only advice (to those who proactively request it) and being an advice-only advisor.


#4 Advice-Only Advisors Believe Most Investors Can Become Successful DIY Investors

Advice-only advisors believe the simplicity of passive investing with low-cost index funds should remove the need for ongoing investment management for many investors. One of the reasons index funds are a powerful financial innovation is they are simple to maintain and easy to understand. Advice-only advisors believe investors using low-cost index funds can be successful DIY investors if they receive good investment advice and follow that advice.

The status quo has been that individuals need to delegate the ongoing management of their investment portfolios to a financial advisor to gain the needed confidence to invest. Advice-only advisors challenge this status quo. They believe that most individuals can, through working with an advice-only advisor, receive the needed confidence to manage their own investment portfolios using low-cost index funds.


#5 Advice-Only Advisors Believe Their Primary Value Proposition is Financial Planning

Wall Street Journal columnist Jason Zweig recently wrote,

Advisers who charge for their services through an investment-management fee while appearing to give financial planning away have trained the public to believe investing is arcane and expensive, while financial planning is mundane and unimportant. The opposite is closer to the truth: Investment management is a commodity whose market price has dropped close to zero, whereas the advice and judgement of a good financial planner can do wonders for your net worth.

Advice-only advisors believe strongly in the financial planning discipline. Financial planning can help an investor set attainable financial goals, manage risks, minimize taxes, pay down debt, and receive clarity on how to use money to increase happiness and well-being.

A financial plan provides the investor with the foundation needed to make good financial and investing decisions. The advice-only advisor seeks to add value by being a first-rate financial planner, and by helping clients build and write a personalized financial plan. The advisor can also provide guidance in helping the client implement the financial plan.


#6 Advice-Only Advisors Can Help Clients Fully Capture Long-Term Market Returns (Almost)

Advice-only clients have a unique cost advantage over clients using a traditional advisor. Since advice-only avoids a large recurring fee, the client can closely mirror the long-term returns of the stock and bond markets.

Case Studies

Let’s consider the potential investment outcome of a 35-year-old investor, Mary, who uses an advice-only advisor over her 60-year investment lifetime. In the year 2020, Mary hires an advice-only advisor for a personalized financial plan and help becoming an effective DIY investor using low-cost index funds.

Mary has $100,000 of retirement assets, and in working with her advisor sets a goal to save $25,000 per year for her remaining 30 year working life. Mary sets a strategic asset allocation target of 80% stocks and 20% bonds; the advisor then helps her set up the needed investment accounts and invest in a few low-cost index funds to achieve the desired asset allocation. Mary pays a $3,000 flat fee for the financial plan and investment advice.

Over the 30-year accumulation phase, Mary decides to stay the course and never adjust the 80/20 asset allocation. She achieves a 5% per year real (after inflation) investment return. Along the way, she pays on average $200 per year (in 2020 dollars) for one hour of annual financial planning and investment advice. She pays the fees by writing a check out of her taxable brokerage account.

In the year 2050, Mary has $2,066,911 (in 2020 dollars) saved in her retirement accounts. She hires a new advice-only advisor (her previous advisor has now retired) to create a new financial plan to help guide her safely through the distribution phase of her retirement lifecycle.

She sets an asset allocation target of 50% stocks and 50% bonds and decides on a simple, low-cost Life Strategy index fund to simplify and automate her portfolio. Mary’s home is mortgage free and she plans to withdraw $60,000 per year (in 2020 dollars) from her retirement accounts to meet her living expenses. Mary pays $3,000 (in 2020 dollars) for the new plan. Over the next 30 years, until age 95, she achieves a 3% per year real, after-inflation investment return. She pays an average of $200 per year for financial planning and investment advice and maintains the 50/50 allocation. Let’s again assume that Mary paid advisory fees by writing checks out of her taxable brokerage account.

In the year 2080, when she is 95 years old, Mary will have $2,145,614 (in 2020 dollars) remaining in her investment accounts. Had she received all the advice for free, Mary would have been a pure DIY index investor and more fully captured the long-term stock and bond market returns, ending with a slightly higher retirement savings balance of $2,226,137.

Let’s compare Mary’s ending investment outcome versus other investors of the same age who would have used one of the other financial advice models. For simplicity sake, let’s do an apples to apples comparison and assume the following: each investor 1) maintains the same asset allocation of 80/20 for the first 30 years and 50/50 for the next 30 years; 2) starts with $100,000 of retirement assets; 3) contributes $25,000 per year from 2020 to 2050; 4) distributes $60,000 per year from 2050 to 2080; and 5) earns similar gross investment returns:

  • Mark hires a flat-fee advisor and pays a $5,000 (in 2020 dollars) annual flat fee. The advisor uses low-cost index funds to maintain the strategic asset allocation.
  • Sue hires a 1% AUM advisor. Her advisor uses very low-cost index funds to maintain the strategic asset allocation.
  • Sam hires a 1% AUM advisor. Sam’s advisor is also a commissioned broker. The same strategic asset allocation is maintained, but Sam ends up in funds that charge a 0.6% per year. His total annual fee is 1.6% of assets.

Here’s a chart showing the ending accumulation in the year 2080 for each investor.

advice only financial planning

Investment costs have a compounding effect over a long investment lifetime. John Bogle liked to say, “the magic of compounding returns is overwhelmed by the tyranny of compounding costs.”

As shown, the best outcome would have been achieved had Mary received free advice from the advice-only advisor. However, paying the advice-only advisor for financial planning and investment advice still allowed her to accumulate her fair share and capture long-term stock and bond market returns.

Mark, who paid the annual $5,000 retainer, had the next best outcome, as shown on the purple line. He ended with a retirement savings balance of $1,181,937.

Sue, paying the 1% advisory fee, had the next best outcome with an ending retirement savings balance of $693,164.

Sam had the worst outcome with an ending retirement savings balance of $122,323. Had Sam lived two more years, his retirement assets would have been depleted. The 1.6% annual fee drain over 60 years became a pound of flesh on his financial health in retirement. Sam is unaware at age 95 that he’d have $2 Million more had the asset allocation remained the same but no advisory fees or fund fees had been perpetually withdrawn from his accounts over his 60-year investment lifetime. The two hands in his retirement cookie jar took way more than their fair share.


#7 How to Find an Advice-Only Financial Advisor

Harry Sit has a unique service where for a $200 fee he will help you find an advice-only advisor in your area (or one out-of-state if you are comfortable working remotely). Here is a link to Harry’s advice-only website: www.adviceonlyfinancial.com. I also recommend reading through Harry’s FAQ section to learn more about the advice-only model. Thus far, Harry has identified 140 in the entire country who meet the requirements of advice-only.  There are around 300,000 financial advisors in the country.

Harry will be a speaker at WCI CON 2020. It will be a great opportunity for attendees to ask Harry about advice-only.

It will be interesting to see if advice-only gains momentum and grows into an important player in the financial advice industry. The rate of growth for advice-only will increase as investors come to understand its value, as younger advisors become convinced it is a long-term sustainable model to build an RIA business, and as personal finance and investing writers help investors see it is a good way to receive good advice at a fair price.

[Editor's Note: I love the advice only model, but it has two flaws. The first is that it is difficult to make a good living doing it, which makes it less attractive to good advisors who want to do well while doing good. I've met many advisors who would like to try this model. Many are struggling financially and I've frankly told several to raise their fees so they can stay in business. This is a relatively minor flaw and can be overcome with good marketing and an efficient business.

The second and more significant flaw is that it eliminates an important service from the advisor's armamentarium–asset management. Why asset management is less important than financial planning or student loan advice or estate planning or retirement account administration or anything else an advisor does is completely beyond me. I do know why it has been carved out though–because it has been abused in the past. Fee-only advisors, particularly those charging an AUM fee, somehow got into the business of gathering assets instead of giving advice and providing service. Asset management was easier to automate and commoditize than personalized one on one financial planning. But advice-only throws the baby out with the bathwater. Just because the industry has overcharged for asset management (“let us manage your assets and we'll give you financial planning whenever you want for free”) doesn't mean it has no value whatsoever, that anyone can (and “should”) do it, and that there is no fair way to price it. While there are definitely people who want someone to teach them how to manage their own assets, I think they're probably a minority. Most people want a “money guy” who will take care of it all for them. And those people are more than willing to pay for asset management, they just want to make sure they're getting good advice (and service) at a fair price. Thus, fee-only can really only serve a certain percentage of those who wish to use a financial advisor. One can argue about how large that percentage is, but it will never be 100%. There will always be room for a good asset manager, even one charging AUM fees. But they will likely find the “fair price” for that service is only 0.1-0.3% a year, nowhere near the 1%+ currently charged by many.

In this article, Ryan argues that “advice-only goes beyond fee-only” as though it is somehow more pure. I would argue precisely the opposite, that fee-only goes beyond advice-only because it offers an additional service. If you want “maximum advisor purity,” do your own financial planning and asset management and skip the advisor all together. Otherwise, recognize that advice-only advisors are simply for people who want less help than an advisor offering more comprehensive services. It's a great option for the right person (and I would argue that more people should use this type of advisor than are currently using them), but not every person.]

What do you think of the advice only model? Does it do enough for the investor? If you're a DIYer, would you pay a flat fee for advice? Comment below!