Avoiding the Pitfalls: Why I Separate My Financial Planning and Investment Management Fees

In the realm of personal finance, there’s a prevailing belief that the ‘advice only’ fee for service approach is more transparent and beneficial for the consumer. From my own experience, I’ve come to value this method for its clear-cut structure, as it separates financial planning from investment management fees. Here’s why I believe in distinguishing these two services and the potential pitfalls that you can avoid by doing so.

Overpaying With Time

When I first started navigating the world of personal and professional finance, I opted for the convenience of bundled services – financial planning and investment management all under one roof. The prospect seemed hassle-free, economical even. Yet, over time, I realized I and my clients were, essentially paying for more than what we were receiving. This was especially true because the needs for financial planning and investment management don’t always align.

Consider this – at the onset of your retirement planning, you might require a lot of input for setting up a long-term financial map. Consequently, the need for a financial planner is more profound at this stage. However, once you’ve set a course and your financial plan is up and running, the requirement for continual financial planning advice tends to taper off. Conversely, investment management is a continuous process, and its demand remains steady.

But here’s the catch – if you’re bound by a combined fee structure, even when you’re only availing of one service, you’re still billed for both. To put it simply, you might be paying for financial planning advice that you’re not even using anymore. I found this to be the case for many of my clients in my 13 years of practice.

The solution? Unbundling the fees for financial planning and investment management. By doing so, clients pay only for what they need and use. It’s a more transparent way of managing your financial services, and it saves you from superfluous expenses.

For example:

1.5% all-inclusive vs 0.8% investment management fee. Over 20 years under the all-inclusive model, a client paid an additional $172,240 in fees for their $500,000 initial investment assuming an average return of 6%. If the fee was separated, the same client would pay $30,000 – $50,000 for financial planning services. That’s approximately $125,000 in savings! The savings may allow you to retire a few years earlier; or perhaps fund your children’s education account. Click here for the fee comparison calculator.

Diminished Level of Service

The drawbacks of the combined fee structure aren’t just limited to overpaying. They can also seep into the quality of service you receive, diminishing it over time. This was another realization I had after many years in the industry.

In my experience, when you put your financial planning and investment management in the same hands, there’s a risk of getting less than the best in one or both areas. The advisor may unconsciously prioritize the service they perceive as more lucrative – which more often than not tends to be investment management. This can leave your financial planning underserved and lacking the depth and breadth of advice you require.

Having a separate financial planner for your retirement strategy and an investment manager for your portfolio ensure that both areas are given their due importance. It means that you have professionals focusing exclusively on each aspect of your financial health, delivering a higher quality of service.

Remember, financial planning and investment management are two distinct services and they each require a certain level of expertise. By having separate professionals handle each, you can ensure they both get the dedication they need. Your financial planner won’t be distracted by portfolio management duties, and your investment manager can focus on optimizing your returns without the additional responsibility of financial planning.

Introducing Potential Bias

The final drawback I’d like to discuss, and arguably the most alarming, is the potential for bias when you bundle financial planning and investment management services. When the same advisor is wearing both hats, there’s a chance that their recommendations may be swayed by their own financial gain, rather than your financial welfare. This potential for bias can have a significant impact on both the advice you receive and the overall performance of your investment portfolio.

When the same advisor is making decisions on your portfolio and planning your financial future, it becomes difficult to discern if their recommendations are truly unbiased and in your best interest.

Adopting the ‘advice only’, fee for service model ensures that your financial planner has no incentive to endorse particular investments, but rather, is solely dedicated to providing you with the best possible financial guidance.

Having separate fees and service providers for financial planning and investment management mitigates the risk of potential bias and brings transparency to your financial journey. It also instills a higher level of trust in the advice you receive, knowing it’s tailored to your specific needs and goals, rather than the advisor’s potential financial gain.

To sum it all up, separating these two services isn’t just about cost savings and service quality; it’s also about ensuring the integrity of the advice you receive.