What is a Fee-Only Financial Advisor?
It is very important for consumers to understand what type of financial planner or financial advisor they are working with. As we look at the question of what is a fee-only financial advisor, first you should know that this type of advisor represents less than 15% of all financial advisors. We're going to answer this question here in this article, as well as introduce you to an organization made up completely of fee-only financial advisors.
What is a fee-only financial planner?
Many financial planners are paid based on the products they sell. This means that if a financial planner recommends a certain product to their client, they may receive a commission from the sale. This type of compensation can create a conflict of interest, as the financial planner may be motivated to recommend products that may not be in the best interest of their client.
On the other hand, financial planners who work under a fiduciary standard are required to act in the best interest of their clients. This means that they cannot receive commissions for recommending certain products. As a result, fiduciaries are more likely to recommend products that are in the best interest of their clients. When choosing a financial planner, it is important to consider how they are paid. If they are compensated based on product sales, there may be a conflict. However, if they work under a fiduciary standard, you can be confident that their recommendations will be in your best interest.
Compensated Directly By The Client
A fee-only financial advisor is, once again, a minority representation of all financial advisors. These financial advisors only get paid directly by their clients. A fee-only financial planner does not get compensated by companies through selling those companies' product.
The only way that a fee-only financial advisor gets paid is directly by their clients, much like an attorney or a CPA. I would mention doctors as well, but I believe some doctors might receive indirect or even direct compensation from pharmaceutical companies.
So we can no longer say doctors are the same. Typically CPAs and attorneys still operate in that manner, and so do the fee-only financial advisors.
3 Ways Financial Planners are Paid
Many people seek out the help of financial planners in order to get their financial affairs in order. However, it is important to be aware of the different ways in which financial planners are compensated, as this can affect the advice they give. There are three main models for financial advisor compensation: commission-based, commission & fee, and fee-only.
- In a commission-based model, the financial planner receives a commission on the financial products they sell to the client. This creates a potential conflict, as the financial planner may be tempted to recommend products that are not in the best interest of the client in order to earn a higher commission.
- In a commission & fee model, the financial planner receives both commissions and fees for their services. This can help to align the financial planner's interests with those of the client, as they will also be paid for providing advice and planning services regardless of what financial products are purchased.
- Finally, in a Fee-Only model, the financial planner is only paid through fees charged for their services. This type of compensation structure eliminates any potential conflict, as the financial planner's only source of income is from fees charged to the client. When choosing a financial planner, it is important to be aware of how they are compensated in order to ensure that their interests are aligned with yours.
Common Ways That A Fee Only Financial Planner Will Charge
When you receive advice from a fee-only financial advisor, they may charge you by the hour, they may charge a retainer, or they may use some other type of calculation based on your net worth and income. Or they may use one of the most popular methods: AUM, which stands for assets under management. This is the amount of money that the financial planner is managing for you. They will typically charge you anywhere from 90 to 200 basis points to manage your money. You will be only way that this advisor will get paid.
Where Does Clark Howard Recommend Finding a Fee Only Financial Planner?
There is a great place that Clarke Howard recommends: The National Association Of Personal Financial Advisors or NAPFA. This group is made up of exclusively fee-only financial planners that have an extremely rigorous continuing education requirement of 30 hours per year. It's one of the highest in the world for any professional association. All of their financial planners are fee-only, and they take a fiduciary oath and a fiduciary standard that they maintain when working with their clients. This is an excellent place to find fee-only financial advisors to work with for wealth management, retirement planning, and more.
NAPFA's Position On Fee Only
Fee-only financial planners are those who fee their clients directly for the services they provide. NAPFA's position is that this fee-only model is the most transparent and objective method available to financially compensate planners - thus minimizing conflicts of interest and ensuring that your financial planner act as a fiduciary, always working in your best interest. Some fee-only structures may include an annual management fee, an hourly rate, or a project fee; The type of fee will be based on the services provided and agreement made between you and your fee-only financial planner or financial advisor. It's important to remember that all NAPFA members are required to work within the fee-only structure - meaning they cannot and do not accept commissions of any kind for their work. This allows fee-only planners provide unbiased asset Management planning services and advice that is in line with what's best for YOU.
What is "Fee Based" Financial Advisor?
There’s a great deal of confusion among investors about the differences between fee-only and fee-based advisors, much of it unfortunately sewed by the industry itself, which tries to downplay the distinctions.
Fee-based financial advisors and planners, on the other hand, are usually registered as investment advisers and registered as brokers by the Financial Industry Regulatory Authority (FINRA). Fee-based advisors could possibly also be paid in other ways from commissions or account fees. As a result of their dual registration, fee-based financial advisors are held to a “suitability” standard when making recommendations, meaning that the recommendation must be suitable for at least some investors. Fee-only financial advisors, on the other hand, are held to a fiduciary standard, meaning that they must always act in their clients’ best interests.
The upshot is that fee-based financial advisors may have more potential conflicts of interest than fee-only advisors, though there are plenty of honorable fee-based advisers who put their clients’ interests first. When in doubt, ask your financial advisor how he or she is compensated. And if you’re still not sure, consider switching to a fee-only advisor.
Fee Based Financial Advisors and Insurance
Many of these types of advisors are dually registered, which gives them the flexibility to manage some clients’ portfolios in a fiduciary capacity (receiving fees but no commissions) while also acting as brokers. This arrangement is perfectly legal, and it allows the advisor to provide a broader range of services. For example, a fee-based advisor could receive fees for managing a client’s portfolio, and then earn commissions for selling the client insurance products.
The key thing to remember is that these advisors cannot be paid fees and earn commissions from the same pool of investments they manage for a particular client. However, they can earn commissions for selling other kinds of products, like insurance and annuities. This arrangement provides more flexibility for both the advisor and the client, and it helps to ensure that the advisor is always acting in a way that takes into account the benefits to their client.
More On Selling Insurance For a Commission
Here’s an example. A fee-based financial advisor charges her client 0.75% ($7,500) a year to manage his $1,000,000 portfolio. At some point, the client decides he needs term life insurance and asks the advisor for recommendations. The advisor recommends several different options offered through her broker-dealer. When the client purchases the policy the advisor receives a commission on the sale, which is paid from a source other than the client’s portfolio.
Client Must be Notified of the Commission
Fee-based advisors must tread very carefully in these situations. They’re required to act in their client’s best interests, and not be motivated by commission considerations. Yet, if the advisor is also earning both fees and commissions from the same clients, there’s a clear conflict of interest. The advisor must inform her client that she is receiving a commission on the insurance policy, and must get the client’s explicit permission to proceed with the transaction. If the client does not give his permission, then the advisor cannot earn a commission on the sale. In order to avoid any potential conflicts of interest, many of these advisors choose to avoid selling insurance altogether.
How Can A Fee Only Financial Planner Help You?
Many people don't save for their future as they think they don't have enough money. A fee-only financial planner will help you by creating a budget and monitoring your progress each month. They will also help you estimate how much you'll need for retirement income and calculate the amount of mortgage debt you can afford to carry. fee-only financial planners are great because they are fee-only, meaning their only source of compensation is the fee charged. This type of arrangement creates an environment in which the planner is more likely to be objective and align their recommendations with the best interests of their clients.
What Are the Disadvantages or Cons To Working With A Fee Only Certified Financial Planner Practitioner?
- One potential downside of working with a fee-only financial advisor is that they may be more expensive than other types of advisors. Fee-only advisors typically charge an hourly rate or a flat fee, which can add up if you need extensive financial planning services. Additionally, fee-only advisors may have a limited scope of products and services that they offer, if they are not educated and up to date. For example, they may not advise on insurance products or provide tax advice. As a result, you may need to work with multiple advisors to get all the financial help you need.
- Another potential downside of fee-only advisors is that they may not be completely free of conflicts of interest. For example, if fees are paid by a portion of assets under management (AUM), they may be biased against you withdrawing funds from your account. What if you want to pay your mortgage or some other debt off?
In some unfortunate cases, fee-only financial planners may ignore simpler investment strategies even when they would be more appropriate, because it would decrease the value or need for their services. It's like dunking a basketball when a lay up will serve the exact same purpose.
While fee-only financial planners can provide valuable guidance, it's important to be aware of this potential conflict before hiring one.
Retirement Ready Success Call
If you want, set up a short 20 minute call with Thomas Cloud, Jr., CFP(R) to discuss how we operate as fee only planners on behalf of our valued clients: https://calendly.com/thomascloud/retirement-ready-success-call. For example you may wonder how much we charge our clients or how much you are currently paying your financial advisor now? We can walk thru those questions with you and get answers to them. There is no cost or obligation.
Also I encourage you to watch my free retirement video: https://go.thirdactretirement.com/strategy