No fee vs. fee only financial advisors & financial planners: which is best?
No fee vs. fee only financial advisors: which is best?
When you’re looking to work with a financial advisor, you’ve probably come across some “no fee financial advisors” and some “fee only financial advisors”. Have you ever asked:
- What’s the difference between a fee only and no fee financial advisor?
- Is a no fee financial advisor better than a fee only? Or is a fee only financial advisor better?
- How much should I expect to pay a fee only financial advisor?
- Should I expect to pay a fee only financial advisor?
- Do all financial advisors charge a fee?
Before I answer the question, I highly recommend you watch this video I recorded that goes through how to avoid running out of money and increase your retirement income.
In most blog posts it's good to have an introduction with similar questions that others may ask related to the main question you're answering
Try to have a call-to-action to your funnel multiple places in the article, not just at the end. Most people skim articles and might not even see the end. So it's good to have it at the beginning, end and sometimes even the middle (if it makes sense to do so)
Is Your Doctor Fee Only And Therefore Paid By You or only The Pharma Companies?
To answer this question, let's imagine for a moment that we are traveling in our car to see our doctor. Our doctor that we're getting ready to see is compensated only by what he sells us. He gets paid commissions from the pharmaceutical companies for prescribing us a prescription. That is the only way that he will get compensated, in addition to, of course, his fees that he receives when he performs surgeries on us. Other than that, there's no other way that our doctor will be compensated. How would you feel about going to a doctor like that, who was only compensated through commissions from pharmaceutical companies?
Well, that is very similar to what you're getting when you go and see a fee-based or commission-based financial advisor. You're going to be receiving advice from them, and the only way a commission-based advisor can be compensated is if you buy a mutual fund, a stock, a bond, an annuity, a life insurance policy, a long-term care insurance policy, a REIT, or one of their many other products. The only way that they will be compensated is if you buy their products.
On top of that, some of their products pay higher commissions than others. Do you think that this type of financial advisor is able to give you unbiased fiduciary advice that is in your best interest? It's very difficult for anyone, when they're trying to support themselves and their family, to give unbiased advice in that type of commission-based environment.
3 Different Types of Financial Advisors and how they are compensated
When we look at the fee-based financial advisor, they are also compensated partially by commissions. They can get a fee by managing some of your money, but they can also sell you an equity indexed or variable annuity and make a 5% or 7% or 8% commission, and it is very tempting to want to sell a product like that.
When you go to a fee-only planner, they can recommended equity indexed annuities and variable annuities that they have access to with no commissions. On top of that, you will get higher payouts than you would in the commission-based products because the insurance company doesn't have to pay the agent a commission.
With a fee-only financial planner, they are selling you zero financial products. They are not compensated by their custodian, nor any insurance or mutual fund company, nor are they compensated by any other type of financial company. The commission-based financial advisors receive trips that they can take to Hawaii, Asia, Europe, Australia, Bermuda, Mexico, in addition to their compensation through selling even more products, or one type of product.
The fee-only financial planner is only compensated by their clients. They do not receive any money from anyone else. I opened my first account with Charles Schwab through Third Act Retirement Planning back in July of 2000, and over the past 20 years, Charles Schwab has not been compensated one penny. And I can't remember that they've even sent me birthday cards or happy new years cards over the years. The only way that fee-only planners are compensated is for the advice that they give, so you go in, you pay a fee and they have a whole plethora of products (which are, by the way, often less expensive than the ones with commission-based financial advisors) that they have access to, and they can recommend them for you and it'll be in your best interest.
The other very important thing about fee-only financial advisors is that they are held to a fiduciary standard, which according to Suze Orman and Clark Howard is important when you're picking out your financial planner. According to Suze Orman,
Not all financial advisors put clients first. And that’s totally legal. The only requirement for many advisors is that they recommend “suitable” investments and products for their clients. There is a lot of room for interpretation between what is best and what is suitable. A smaller cadre of advisors adheres to the higher “fiduciary” standard. A fiduciary vows that all recommendations are indeed in the best interest of the client. As far as I am concerned if you want to work with a professional advisor, you better check that you are working with someone who acts as a fiduciary.
And additionally, fee-only financial planners like Thomas Cloud Jr. at Third Act Retirement Planning are required to complete 30 hours of continued education per year. There is no other profession in the world that has that type of continued education, except for CPAs who require 40 hours per year. Both doctors and lawyers have continued education requirements that are less than financial planners that are members of NAPFA.
Click here to watch my Free Video Presentation that Reveals...
How To Avoid Running Out Of Money In Retirement AND Potentially Increase Your Income In Retirement... By Making ONE Simple Change To Your Finances! You will learn:
- How one simple change to your finances can increase your retirement income
- How one simple change to your finances can help you avoid running out of money
- How to do all this without needing to invest more money or spend more time on your finances