Getting it fair and square: is the flat fee for financial advice about to go mainstream?

• Author: Bachrach, Bill
• Position: Business & Finance

I NEVER HAVE believed that a person who gets paid a commission or an asset fee is more or less ethical than a person who gets paid a fee for his or her advice. People-not compensation methods--are ethical or unethical. Yet, there is a simple elegance about the flat-fee-for-advice financial advisor. It is totally transparent. There never is any question about how you are being paid or whether there is a potential conflict of interest, and it is very easy for the client to understand. It makes the "product" the advice rather than the product being a financial plan, investments, insurance, annuities, tax returns, or legal documents. Whether you like it or not, there can be a perception that, if you get paid by a product or service provider, you may be influenced by higher compensation or better perks. Consumers and the regulators naturally ask questions like, "Was that the best product for the client or was that product recommended because it paid a higher commission, a bonus, or to qualify for the trip to Hawaii?"

It is possible for a client or prospective client's perception of your trustworthiness to be different than your actual trustworthiness--and this perception could be influenced by how you choose to be paid.

As a reminder, lee-based and fee-only are different. Fee-based usually is a percentage of assets or net worth and lee-only is an hourly rate or a flat dollar amount, usually an annual number that is paid monthly or quarterly and deducted automatically from a bank or money market account. The premise of the fee-only model is that the advisor is being paid for his or her advice and receives no compensation from any other product or service provider. If you choose to be fee-only, I recommend the flat annual rate over hourly.

Consider the term "new normal" as a way to understand the trends that will make the flat fee-for-advice model ubiquitous, possibly very rapidly. New normal has become popular because of how rapidly something can change, leaving what used to be normal forever in the dust.

The first cell phones, for instance, were called "car phones" because they were mounted in your car. They cost $2,000, plus 20-40 cents a minute and they only made and received phone calls. We were thrilled to have them. Automobile companies built them physically into vehicles, mounting them inside the console or the dashboard. They were ubiquitous--until they were not. How much would you pay today for a cell phone permanently mounted in your...