Why I Charge Based On Net Worth

Most people I speak with do not know exactly how they pay for financial advice, or what dollar amount they are paying for that matter. This week, I’d like to discuss why I chose to charge for my comprehensive financial planning service based on client’s net worth.

Your net worth is your personal balance sheet. Add up all of the assets you own and subtract any outstanding loan and debt balances you have, and that is your net worth.

The majority of financial advisors these days charge based on the amount of money they are managing for their clients, or “Assets Under Management” (AUM). On average, this fee will come out to 1% of the assets they manage directly. I do not believe this is the best way to charge for financial planning, as your fee is tied to your investment assets, not to everything else that a real financial planner helps with.

Transparency

Charging based on net worth creates the ultimate transparency. As you can see on my pricing chart, my clients know exactly how much they are paying Lyndale Financial on a monthly basis.

This is important because when you know exactly what you are paying for a service, you will expect a certain level of service in return.

When you do not know how much you are paying for a service, you may not feel the need to reach out to your advisor for help. This can cause lasting negative effects in your relationship with your advisor, which I believe needs to be open and honest at all times.

Reducing Conflicts of Interest

When an advisor charges you based on the amount of money you are investing with him or her, a conflict of interest arises.

For example, if you have $1,000,000 invested with your advisor, then the advisor will be making approximately $10,000 per year for the service provided. However, what if you want to use some of that investment to start a business, or buy a vacation home? This will end up reducing the amount of money managed by the advisor and in turn reduce their compensation. This is a conflict.

When I charge clients based on net worth, these conflicts are greatly reduced, as we would simply be moving assets from one account to another location (investment account to home or business equity). I want to see your net worth grow as much as you do - leaving us in a spot to work as a team at all times.

Better Aligned To Financial Planning

As advisors charge only on investments they manage, their ultimate focus stays on the investments they manage. I know advisors say they can help out with anything you need, but are they proactive with your needs? When was the last time they talked to you about ways to increase your income, or the optimal debt reduction strategy?

With my clients, the focus is always on the big picture (your net worth). True financial planning spans six main components:

  1. Fundamentals (Budgeting, Debt Management, Emergency Savings)

  2. Investment Planning

  3. Insurance Planning

  4. Tax Planning

  5. Retirement Planning

  6. Estate Planning

For every one of my clients, we discuss these areas in great detail to make sure they accomplish their goals over time.

Charging based on net worth forces me to spend time with clients in all of these areas, because when any one area is neglected, the financial health of clients may be reduced.

Measure Your Net Worth Progress

Financial advisors often times (at least I really really hope) will look at your net worth or financial status early in your working relationship. Unfortunately, I rarely hear that this evaluation occurs year after year, as it should.

When charging by net worth, my client’s progress is measured every year (every day for that matter, as it is the first thing they see when logging into their client portal).

 A sample net worth display my clients can see upon logging into their client portal, updated daily.

A sample net worth display my clients can see upon logging into their client portal, updated daily.

I do not focus on investment returns, as they simply are not what’s important when conducting real financial planning for clients. Our discussions revolve around financial freedom, reducing stress in their lives, and achieving their lifelong goals, not what the stock market is doing today.

Grow With You

To wrap this discussion up, I want my clients to know that I want to grow with them. By focusing on the big picture, we can work together to create the best life possible.

If I only focus on optimizing an investment portfolio, meanwhile my client is more stressed about paying the bills that month or not knowing how to reduce their debt, then I have failed at my job.

I want to help my clients with all of their financial needs. In helping my clients grow their net worth and feeling more confident about their finances, we are able to grow together.

If you are interested in working together or simply finding out how (and how much) your current advisor is charging you, feel free to send me a message here.

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