In the complex world of personal finance, individuals often seek guidance and expertise to make informed decisions that shape their financial future. As the demand for comprehensive financial services continues to grow, many advisory firms are offering solutions that combine financial planning with investment management services. While this approach offers convenience and a seemingly seamless integration of services, it's crucial to peel back the layers and examine the disadvantages that come with combined service models
It's important to recognize that there is no one-size-fits-all answer to finding a financial planner or financial advisor. Each individual's financial situation is unique, and what works well for one person might not be the best approach for another. By understanding the intricacies of services that combine financial planning and investment management, you'll be better equipped to make informed decisions about the financial services your choose to engage with.
When you search for a financial planner or financial advisor you will likely come across different service models. Some advisors may be more focused on investment management, some may be more focused on certain products such as insurance and annuities, and some may be more focused on holistic financial planning and not as much on investment management.
Here are some of the more traditional financial planning and financial advice models:
- Traditional financial planning is the main service, with investment management included, sometimes for an additional fee.
- Traditional financial planning is included as an additional service along with the main service of investment management.
- Traditional financial planning is included as an additional service with a product, such as insurance or an annuity.
There are other possibilities as well, such as a model known as Advice-Only that excludes investment management and the sale of products.
What is Advice-Only Financial Planning?
Advice-Only is a newer and growing form of financial planning and advisory services where the advisor provides recommendations, guidance, and expertise on various aspects of a client's financial situation without actually implementing or managing any financial products on the client's behalf. In other words, the advisor's role is limited to giving advice and helping clients make informed decisions about their finances. Advice-Only financial planning can be particularly attractive to individuals who want unbiased advice, are comfortable making their own financial decisions, and are looking for guidance without the pressure of purchasing specific financial products.
Key characteristics of Advice-Only financial planning include:
- No Product Sales: Unlike traditional financial advisors who might earn commissions or fees from selling financial products (like investments, insurance, or loans), advice-only planners do not sell products. This eliminates potential conflicts of interest that could arise from pushing certain products for the sake of earning higher commissions.
- Fee-Based Compensation: Advice-only planners typically charge a fee for their services. This fee can be structured in various ways, such as hourly rates, flat fees, or project-based fees. This compensation model ensures that the advisor's income comes directly from the client, aligning their interests with the client's best interests.
- Holistic Approach: Advice-only financial planners often take a holistic approach to financial planning. They consider all aspects of a client's financial situation, including budgeting, investments, retirement planning, tax strategies, estate planning, and more.
- Education and Collaboration: A significant part of advice-only financial planning involves educating clients about financial concepts, helping them understand their options, and collaborating to develop a customized financial plan that aligns with the client's goals and values.
- Objectivity: Since advice-only planners don't have a vested interest in selling specific financial products, their recommendations are generally considered to be more objective and tailored to the client's needs.
- Transparency: Because the compensation structure is based on fees, advice-only planners often emphasize transparency in their fee structure and the services they provide. Clients have a clear understanding of what they are paying for.
- Client-Centric Focus: The primary focus of advice-only financial planning is on the client's overall financial well-being and achieving their financial goals. The planner's role is to empower the client with information and strategies to make well-informed financial decisions.
There are many differences and benefits that the Advice-Only model offers to clients compared to the traditional models. Here are some of the disadvantages of the traditional financial planning and advice models, and how Escient Financial's advice-only financial planning services compare.
Comparing Advice-Only to Traditional Financial Planning and Advice
There are many differences and benefits that the Advice-Only model offers to clients compared to the traditional models. Here are some of the disadvantages of the traditional financial planning and advice models, and how Escient Financial's advice-only financial planning services compare.
Conflicts of Interest
With traditional financial planning where investment management is involved, the financial advisor may receive a higher fee from you based on your assets that they are managing. This may mean the financial advisor will want you to transfer as many of your accounts and assets as possible to their management so that they can earn a higher free.
Even if the fee isn't based on AUM, it may be based on your net worth, which means the financial advisor is enticed to grow your assets as much as possible, which could mean more risk.
Some financial advisors may work for a broker-dealer and earn commissions or fees from your investing in specific financial products. They might be incentivized to recommend products that offer higher commissions, even if those products aren't the best fit for the client's needs.
All of this can lead to recommendations that prioritize the advisor's financial gain over your best interest.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning there is no investment management and there are less conflicts of interest. Therefore there are no product sales. no commissions, no push for growing investments under management at the expense of increased risk, and the recommendations and advice are always in your best interest.
Limited Objectivity
Advisors who are compensated through commissions or product sales, or whose fee structure is based on net worth, income, or assets under advisement, might have biased perspectives, as their income is tied to specific recommendations. This can compromise the objectivity of the advice they provide. Advisors providing both financial planning and investment management might be influenced by the potential for higher compensation through managing larger investment portfolios. This could impact the objectivity of the advice provided.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning it doesn't matter what your assets are or where they are. Clients pay for comprehensive, holistic, fiduciary financial planning and advice that is objective and oriented to help them reach their goals.
One-Size-Fits-All Approach
Some firms that offer bundled services might adopt a standardized approach to investment management and financial planning. A common way this is accomplished is with the use of model portfolios, where all of their clients are essentially in the same portfolio of investments. This can lead to a lack of customization, where clients' unique financial situations and goals might not receive adequate attention.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning all recommendations and advice, including investments, are customized to the clients current situation, future needs, and goals that have been established. There are no model portfolios, so each clients investment recommendations and advice are going to be different.
Complex Fee Structures
Some traditional models involve complex fee structures that may not be transparent to clients. For example, many traditional financial planners and advisors may charge separate fees for different services, such as a flat fee for the financial planning and then an additional AUM fee for investment management, and these fees can be charged at different times on a monthly, quarterly, or annual basis. This lack of clarity can make it difficult for clients to understand how much they're paying for various services and products. This can be exacerbated when the fee is deducted from investment accounts and difficult to locate in statements or fully comprehend.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning there is only one fee paid by clients for financial planning, and that fee is a flat fee paid on a one-time or ongoing monthly basis. Clients are always aware of how much they're paying for financial planning services and advice and when that amount is paid. Since Escient Financial doesn't manage investments, client accounts and assets are left where the client currently has them and wants to keep them, and Escient Financial's fees are never deducted from client accounts.
Inadequate Focus on Education
Learning and educating about financial concepts and strategies takes extra time. Traditional financial advisors are paid for adding more and more assets under their management and then managing those assets. This can leave clients with a limited understanding of their financial situation and options.
Perspective of Escient Financial's Advice-Only Financial Planning
Part of Escient Financial's core belief is that clients will be able to better achieve their goals and feel better about achieving those goals if they understand how to do it and how it was done once they get there. Also, with the Advice-Only model, clients will manage their own investments and need to understand and know how to do so, especially when it comes to digital assets and cryptocurrency. Escient Financial provides that education, and even step-by-step guidance if desired, for every client.
Lack of Alignment with Goals
Clients might receive recommendations that are driven by the advisor's need to sell products, rather than solutions that align with the client's specific financial goals and circumstances. Some firms offering combined services might use standardized investment strategies for all clients, regardless of individual risk tolerance, time horizon, and financial goals. This is done so the advisor spends less time with each client so they can serve more clients.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning the plan and advice provided are customized and specific to each client, their circumstances, and their goals. There is no cookie-cutter process, so even if your best friend is also a client and you share your experiences with each other, you'll find that you each received a different plan and different advice for reaching your goals.
Higher Fees
With commission-based compensation models, clients might incur higher costs due to commissions and ongoing fees associated with certain financial products. For the provider of the financial product to earn enough revenue to pay commissions, they will typically have higher fees for those products. Not only do you pay the fee to the advisor, but you're also paying higher fees within the products. These are referred to as an expense ratio, and is a percentage of the assets that the provider of the financial product takes each year. For example, if the financial advisor charges an AUM fee of 1%, and you have $1 million in investments that they are managing, you're actually paying them about $10,000 per year for their services. If you have a $5 million portfolio that they're managing, you could be paying as much as $50,000 per year. As mentioned above, there may also be higher fees within the financial products they've sold to you.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning, you get investment advice without the investment management or fees associated with it. You pay a simple flat fee that right now is no more than $5,200 for the first year for an initial financial plan and ongoing comprehensive financial planning, and then no more than $2,400 per year thereafter. That's for couples, and it's even less for single individuals... as low as $1,200 per year. Escient Financial also aims to keep the fees you pay within investment funds (referred to as expense ratios) lower. Expense ratios can really add up over time, so Escient Financial focuses on funds that have lower expense ratios whenever possible to ensure your assets aren't being chipped away at as much over time.
Product-Centric Approach
Advisors in traditional models might prioritize selling financial products rather than providing holistic advice. That can lead to a narrow focus on individual products rather than a comprehensive financial strategy. This is especially true for financial planning and financial advisors at insurance companies. As an insurance company, their main product and largest source of revenue is going to be insurance policies and insurance-type products, such as annuities. These products may sound appealing, but typically have much higher costs, limited upside potential, and may not be suitable or the best investment for your situation.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning there are no product sales. Since Escient Financial doesn't receive any commissions, any recommended product is going to be what Escient Financial believes is in your best interest, and reasoning with advantages and disadvantages to the product and recommended strategy will be provided.
Pressure to Sell
Advisors in traditional models might feel pressure to meet sales targets or quotas set by their firms. This pressure could lead them to recommend products that might not align with the your best interests, and they could pass that pressure on to you.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning there are no sales targets or quotas. Recommendations and advice that's given to you is what is believed to be in your best interest. They are also just recommendations and advice, and it's ultimately up to you to act on them, though Escient Financial is also here to keep track and provide accountability.
Limited Focus on Non-Investment Planning
Many financial advisors using traditional models have an emphasis on investment management rather than providing holistic financial guidance. This could lead to a situation where investment performance becomes the primary measure of success. Clients might become overly dependent on investment performance to achieve their financial goals. The focus on investment management could lead to overlooking critical aspects of financial planning, such as tax planning, estate planning, insurance needs, debt management, and retirement income strategies.
Perspective of Escient Financial's Advice-Only Financial Planning
Escient Financial's Advice-Only financial planning is a comprehensive holistic service that considers all aspects of your financial life, including tax planning, estate planning, and risk management, as well as many others, all while still providing investment advice so that your assets can grow and help enable you to achieve your goals.
Inadequate Communication
Advisors might prioritize managing investments over maintaining regular and open communication with clients about their evolving financial needs, goals, and changes in circumstances.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning clients receive regular follow-ups on various areas involving their financial plan. For example, if property and casualty insurance is up for renewal, there would be an insurance review to make sure the right coverage is included in the policy. Or, if employee benefits are up for open enrollment, there is a review of the benefits that have been selected to ensure they are still appropriate.
Limited Flexibility
Some financial planners and advisors create bundles of services. These bundled services might limit the ability to get financial planning for certain focus areas there may actually be a need for. For example, a bundle or tier of service may include many areas, but exclude estate planning or tax planning, which could be essential for the future success of the financial plan and ability to achieve goals.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial all focus areas are included for all Comprehensive Financial Planning clients.
Suitability vs Fiduciary Standard
Some traditional advisors operate under a suitability standard, which means they only need to recommend products that are suitable for your situation, rather than the fiduciary standard, which is a requirement to act in your best interest. This can result in suboptimal recommendations, where better options could improve the ability to achieve goals with better performance and/or lower fees.
Perspective of Escient Financial's Advice-Only Financial Planning
With Escient Financial's Advice-Only financial planning there is a focus on finding the best solutions for you to help you achieve your goals.
It's important to note that not all traditional financial advisors are solely motivated by product sales, and there are many ethical and client-focused advisors who provide valuable guidance. Additionally, not all firms that offer bundled financial planning and investment management services are subject to these disadvantages. Some firms have a fiduciary duty to act in the client's best interest and offer well-integrated, comprehensive services. It's essential for individuals to thoroughly understand the services offered, the fees associated with those services, and the potential conflicts of interest before engaging with any financial advisor or firm.
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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. 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. Digital assets and cryptocurrencies are highly volatile and could present an increased risk to an investors portfolio. The future of digital assets and cryptocurrencies is uncertain and highly speculative and should be considered only by investors willing and able to take on the risk and potentially endure substantial loss. Nothing in this content is to be considered advice to purchase or invest in digital assets or cryptocurrencies.
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