Fee-for-Service (Fee-Only) Financial Advisor Planner

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What Is a Fee-Only Financial Advisor?

There are many types of financial professionals to choose from. The question that most often comes up is, "how do I know you are acting in my best interest?" The reason for this question is that many consumers experience working with Financial Planners and Advisors as product salespeople who earn commissions by selling financial products. They wonder if the product being recommended is right for them or is it being sold because the advisor only is interested in earning a commission.

Commissions on financial products such as mutual funds, annuities, and life insurance vary and can be quite high. In order to pay these sales commissions, the product provider charges fees that in most cases are buried within pages of fine print and are not required to be fully and clearly disclosed. This is why many consumers working with commission based advisors assume they do not "pay" for the financial advice. In addition, many financial products have a surrender penalty the purpose of which is to recover commissions already paid if you surrender your product early. Once the product is sold and the commission earned, many consumers do not hear from their "advisor” until there is another opportunity to sell another financial product and earn another commission.

Working with a broker may be problematic as well due to lack of fee/commission disclosure. Many brokers are engaged in principal trading which means selling you securities from the firm's account with a markup which is how they are compensated. The problem is that these markups are not disclosed which means you have no idea how much you are paying for the service provided and therefore cannot reasonably compare to alternatives. To make matters worse, many brokerage accounts do not provide performance reporting. This begs the question of why do many Wall Street Brokerage firms not want you to know how much you are paying for thier services and how well your account is performing compared to appropriate benchmarks?

These hidden fees can result in less than fully informed financial decisions that can negatively affect your wealth. Conflicts of interest such as this exist in all businesses however when receiving financial advice you should have the right as a valued client to feel confident that your interests are coming first. An alternative to the commission based/transactional financial sales environment is working with a Fee-Only Advisor.

In short, Fee-Only means that there are no commissions or hidden fees for product sales that will create potential conflicts of interest. You receive advice because you pay a fee just like you would if you went to a Doctor, Dentist, Attorney, CPA/Accountant, or other Fee-for-Service professional. Fees can be in the form of hourly, fixed, project, retainer, a percentage of assets under management (AUM) and/or advisement, or some combination thereof. This Fee-for-Service model is the most open and client centric model and greatly reduces the potential conflicts of interest inherent in a transactional relationship where commission rates may vary by product.

As the Fee-Only model has grown and informed consumers continue to demand financial advice that is in their best interests, a shift has been occurring from traditional transactional relationships to ”Fee-Based” relationships. As such, the Wall Street Marketing Machine has been successful in blurring the distinction between "Fee-Only" and "Fee-Based" financial advisors. As a result consumers who are seeking Fee-Only advisors who do not have the conflicts inherent in a commission based, product/transaction driven environment are being misled and confused. So now consumers are faced with differentiating between "Fee-Only" and "Fee-Based" financial advisors. The following will help you to understand the distinction:

Fee-Only

  • The advisor works directly and exclusively for the client
  • Advisor is a Fiduciary required by law to act in your best interest
  • Registers as an Investment Advisor; is not a securities broker employed by a broker/dealer firm
  • Advisor compensation is fully disclosed and paid directly by the client
  • There is no additional compensation when a product is purchased
  • Any conflicts that may arise are fully disclosed (i.e.- Should you pay off a mortgage early versus investing when there is an AUM fee)
  • Advisor is completely independent from any financial product providers
  • Advisor is not beholden to an "approved" list of products/strategies dictated by a broker/dealer firm
  • Product recommendations are based on what is best for the client, not advisor commission
 
Commission
  • Recommendations need only meet a standard of suitability which is not necessarily the same as what is in your best interests.
  • Compensation is tied directly to the purchase of a recommended product
  • The advisor is only compensated when you purchase products he/she recommends
  • Advice can and often is limited to product recommendations
  • Product recommendations may be limited to an "approved" list by the broker/dealer firm
  • Proprietary products may have higher fees which are not required to be fully and clearly disclosed
  • Clients are often led to believe there are no fees being charged for the advice when in fact the fees are simply hidden
  • Compensation varies by product type and company. For example an annuity may pay a commission such as 8% versus a mutual fund that may pay 5%
  • Incentives such as bonuses and trips are offered to salespeople to push certain products
  • Management may pressure sales force to push certain products
  • Tends to produce an adversarial relationship between advisor and client
  • Conflicts of interest are not required to be disclosed
  • Little to no incentive to service the client exists after the product sale until there is a possibility of another product sale
  • Difficult for the consumer to know if the recommendation is in their best interest, or because the salesperson makes more money
 
Fee-Based
  • Usually means a combination of fees for some services and commissions for products sold
  • The advisor may charge fees for planning and/or investment management, however may also earn a commission from selling an annuity, life insurance policy, or other financial product
  • Is confusing to a consumer who is specifically searching for a "fee-only" advisor
  • Client may be unable to determine if the advisor is acting in a fiduciary capacity or a sales (suitability) capacity
  • All issues listed above for commissions still exist.
  • Terms such as "fee-based only" and "fee only investment management" are used to further confuse the consumer into thinking the advisor is truly "fee-only" when they still may accept commissions for insurance and other financial products.

It is important to know these differences so that you can be confident that your interests are coming first. Consider for example that the purpose of a publicly traded corporation is to maximize the value of the company for the benefit of the shareholders/owners of the company. Therefore by contractual law between the employer (Firm) and the employee (advisor), the interests of the stock holders of publicly traded brokerage firms, broker/dealer firms, banks, and product providers must always come first, not the clients. This is in direct conflict with being a fiduciary to the client. The Board of Directors pressure Management to show profits who in turn pressure the advisors/salespeople to produce thus creating the sales culture that exists today.

Consumers searching for and working with financial professionals should understand the differences between these terms and how their advisors are compensated. Your advisor should always be willing to disclose all compensation and fees involved in a transaction or product sale. If they are unwilling or unable to explain how their compensation is structured, or they are dismissive and/or try to avoid compensation questions, you should consider searching for another advisor. The solution is to work with an independent fee-only fiduciary advisor so that you can be confident that your interests always come first and you are receiving independent advice free from hidden fees.
 
Don't let hidden fees squeeze YOUR money! Schedule a complimentary Discovery Consultation to find out how Fee-Only Comprehensive Financial Planning and Investment Management services can help you build a solid financial future.