When I tell people I am a Fee-Only Financial Advisor, I often find there is considerable confusion around what this means and how it is different from other advisors. The distinction is so important that when I was in college studying to become a CERTIFIED FINANCIAL PLANNER™ it was reviewed with the class on the first day.
While there are ultimately all sorts of financial advisors, we can generally classify them into two major categories: Fee-Only Advisors or Fee-Based Advisors.
I strongly believe that working with a financial advisor can be one of the best investments you can make. But, just like all investments, there can be risks, so proceed with caution and make sure you are aware of which type of an advisor you are working with.
Fee-Only Financial Advisors only receive compensation that is paid directly to them by their clients. Fee-Based Advisors may receive both fees for a plan as well as commissions for investment, insurance, or other financial products they recommend.
How an advisor is compensated for their services should always be the first question you ask when meeting with an advisor. As with shopping for anything, it is natural to gravitate to low cost options. While the cost of financial advice is undoubtedly important, you should also be critically aware of what you are getting and not getting with the advisor’s services. The impact of potential conflicts of interest and not receiving objective advice can add up to be much more costly in the long-run
Fee-Only vs. Fee-Based Financial Planning
Fee-Only = Only charges a fee directly paid by the client for a financial plan and advisement.
Fee-Based = Charges a fee for a financial plan as well as may receive commissions from plan recommendations.
Fee-Only Advisors will never, under any circumstances, receive additional compensation for any of their recommendations. This allows the advisor to sit on the same side of the table as the client. If it is in your best interest to pursue a certain strategy the advisor will recommend it.
Fee-Only Advisors may charge fees based on a variety of methods including flat fees, hourly fees, one-time projects, or based on the assets they manage (also called AUM or Assets Under Management). Fee-Only Advisors are much less common and traditionally clients needed high levels of investable assets to work with one. However, this barrier has been changing in recent years and groups like the XY Planning Network make it easier to find a local, fee-only financial advisor that may be the right fit for you.
Fee-Based Advisors can receive compensation both from fees paid directly by their clients as well as commissions on recommendations they make. Many of these advisors will do a “plan” for potential clients for little or no cost at all. This brings to mind the old adage “there is no free lunch”.
Many of these plans can lead back to services or financial products they recommend such as insurance, annuities and other financial instruments. Given that they receive additional compensation and sales awards when you purchase them they may be more likely to recommend these products than to provide advice such as building an emergency fund, saving for a house, mitigating market timing risk, or paying off high interest loans.
Conflict of Interest - Example
Imagine you have decided you want to invest in updating the landscape of your home. You really want a professional appearance and have decided to pay for a plan from a landscape designer. When you get the plan back and make your payment you are surprised as many of the recommendations do not match what you had talked about. If, for example, you found out later that the designer got paid a commission on certain plants they sold based on their current inventory the whole process and their recommendations would likely make a lot more sense.
When it comes to your financial future it is important to make sure you are aware of any and all conflicts of interest in advance of beginning to work with your new advisor.
GuidePoint Financial Planning - Northern Va Financial Planning
Ryan Phillips, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.