Why Fee-Only?

How you pay a financial advisor for their services is a very important consideration. This is because it will largely dictate their ability to provide you with objective advice.

How Do Financial Advisors Get Paid?

Currently, there are only a couple ways that a financial advisor can get paid for the services they offer. These models will vary and will determine largely what kind of advice you will receive.

*Note that the term financial planner and financial advisor will be used interchangeably.

Commission

Commissioned advisors receive their compensation whenever they sell a financial product, whether an investment or insurance product. Some types of products that are sold with a commission are mutual funds, life insurance, and annuities. Because their compensation is largely tied to selling these products their advice is typically only tied to the product and may not be in your best interest.

Commissioned advisors were formerly held to a “suitability standard” which meant they could sell products to customers as long as the products were “suitable” for the client. However, this didn’t necessarily mean that the product was in the client’s best interest. Today, these advisors function under the new “Regulation Best Interest” rule which is the SEC’s attempt to get brokers-dealers to “act in their client’s best interest” by avoiding conflicts of interest.

Regardless, whenever the sale of a product determines compensation the possibility of conflicted interests will remain.

Fee-Only

Fee-only advisors are held to the highest standard of care available in the industry, which requires them to put their client’s interests ahead of their own AND to openly disclose any conflicts of interest they may have. Also by operating under this standard, fee-only advisors are bound by ethical and legal obligations to put their client’s needs first. Basically, if they give you bad advice then they are held liable.

Fee-only advisors are compensated directly from their clients for the advice they provide and don’t receive any commissions, undisclosed fees, or compensation from third party agreements. Because of this you can be at peace that the advice you receive is based solely on your values, needs, and objectives.

Fee-Based

Fee-based financial advisors are a combination of both the aforementioned options. They charge fees for the financial planning and investment management they provide but they also receive commissions for selling investment or insurance products. Additionally, they might also receive commissions and kickbacks from third parties for referrals or other services related to their advice.

Fee-based advisors will often use commission-based products for “smaller” clients (e.g. those will lower investable assets) and charge a fee based on a percentage of assets for larger clients. This is how they maximize their profit margins.

Why Should I Hire a Fee-Only Financial Planner?

Fee-only advisors are the minority within the profession right now.

That means that most financial advisors out there aren’t held to the highest standard of care when providing their clients with financial advice. Most advisors are prioritizing their interests above their client’s interests, which is wrong.

Are there good commissioned-based, or fee-based, advisors out there? I’m sure. Are their bad fee-only advisors out there? Probably. However, if you want objective advice that’s in your best interest then the odds are largely in your favor by choosing a fee-only advisor.

How Do Fee-Only Financial Planners Charge Clients?

There are a few different fee models that fee-only advisors can incorporate into their practices. You’ll have to find which model you’re most comfortable with and that makes the most since for you.

Here they are options:

Hourly

The hourly fee model is simply paying for “hours” of the advisor’s time. This model is comparable to how you would hire an attorney. This model is mostly seen with engagements that are limited in scope and nature (financial plan, check ins, projects, etc.). This typically isn’t used for ongoing service but can be depending on the advisor.

Assets Under Management (AUM)

This model is currently the most prevalent “fee option” in the profession for advisors managing investments. This fee is assessed as a percentage, typically around 1%, of the assets the advisors manages on behalf of the client. However, you’ll often find varying services that are included with this option based on the advisor.

Finally, you will often see fee “breakpoints” which lower your overall fee percentage as your investment balance grows.

Note: You will often see conflicts of interest with this model as advisors recommend moving as many assets to them as possible (e.g. 401k rollover) because they will receive additional compensation.

Flat Fee

This model is just as the name sounds, a flat fee. This fee is a pre-defined amount, quoted in dollars, that the client pays for the service they receive. Service may range from a financial plan to a project or for ongoing service. No matter what the route, you’ll always know what you’re paying.

Depending on the advisor, they may charge every client the same fee OR they may charge a fee based on the complexity of the client.

You may also see the flat fee change over time.

Flat fees are often presented as an annual fee paid monthly, quarterly, or semi-annually.