Perhaps you are getting serious about some of your financial goals and want the help of a financial planner, but first want to understand how much their services will cost you. Or maybe you already have a financial planner, but find their intentions dubious or their charges extravagant and want more information about how financial advisors are compensated.
Either way, it’s important to understand how someone who is handling your finances earns their income. Not understanding how your financial advisor is paid is a common financial planning mistake that can have significant consequences.
In this article, we’ll cover the different ways financial advisors get paid, as well as which method is generally best for the client.
Fee-Only, Fee-Based, or Commission-Based
The cost of a financial planner will hinge on how they earn their income. There are typically three methods by which planners receive compensation: fee-only, fee-based, or commission-based:
· Fee-only means that planners are paid directly by their clients. They could be paid a flat hourly or project-based fee, as a percentage of the assets they manage, or as a retainer.
· Fee-based is a term that planners use when they charge a fee for their services, but can also collect a commission. It’s easy to understand why these first two terms often cause confusion, but they can represent very different types of service.
· Commission-based financial planners receive a payment each time they sell a product—stocks, mutual funds, or insurance–to their client.
Generally, fee-only advisors are the best option for clients seeking a financial planner who they can trust. Here are six reasons why:
1. They can offer holistic financial planning.
Although financial advisors who earn commissions can also offer holistic planning, fee-only financial planners are often more inclined to offer this level of service. After all, holistic financial planning is time-intensive and doesn’t guarantee any type of payout in the form of commissions, since it tends to be more life-focused than product-focused.
When you enter a professional relationship with an advisor whose overriding interest is not selling products, you have a better opportunity to receive a plan that encompasses various aspects of your financial life: advanced tax planning, college planning, income and expense planning for life, estate planning, investment planning, risk management and more.
2. A fee-only financial planner can offer comprehensive advice.
Because fee-only financial planners are not in the business of selling products, they spend most of their time with you offering advice. As they develop a comprehensive financial plan for a client, they rarely discuss specific products. Instead, they focus on helping their clients make sound financial choices. And when the time comes for choosing products to carry out the plan, fee-only financial advisors are not burdened by limited options because they do not have ties to a specific company.
3. They have a fiduciary responsibility.
What is a fiduciary? It’s someone who acts on behalf of another person and places that person’s interests ahead of their own. Being a fiduciary means being bound both legally and ethically. And one of the main advantages of choosing a fee-only financial planner is that they are required to function as a fiduciary.
Fiduciaries are bound to ethical obligations, the primary one being a duty to act in their clients’ best interest.
4. Fee-only financial advisors are less likely to have a conflict of interest.
Conflicts of interest ensue when a financial planner’s interests collide with a client’s best interests. This can happen if a product offers a hefty commission, but maybe isn’t the best option for the client.
Identifying conflicts of interest can be most difficult when working with a fee-based advisor. That’s because these advisors can call themselves fiduciary, but in reality, they are only required to put their clients’ best interest first when working in an advisory capacity. When selling a product, they are only required to recommend a product that can be defended as “suitable.”
By selecting a fee-only planner, you are more likely to remove the conflict of interest from the equation and receive advice targeted toward your best interests. Plus, you won’t have to try to determine when you are working with your advisor in their fiduciary capacity versus their suitability capacity.
5. The costs can be more predictable.
There is a lot of guesswork and gray areas with commission-based and fee-based planners when it comes to cost. The client doesn’t always know what they are paying, especially because part of the advisor’s compensation might be layered into the ongoing cost of a product.
With a fee-only financial planner, you will know how much compensation the advisor will receive. As mentioned earlier, fee-only planners can structure their fees differently: they might charge by the hour, apply a flat fee, or charge on a percentage of the client’s assets. This transparency removes any doubt about what you are paying for your planner’s services. It also arms the client with the ability to determine whether the value of the financial advisor’s services warrants the cost.
Due diligence is essential to when finding a financial planner
To verify whether a financial planner is truly fee-only, you can first check to see whether they are registered with the National Association of Personal Financial Advisors (NAPFA), which is a professional organization for fee-only advisors. Their members must not only provide fee-only services but also adhere to high standards, such as engaging in rigorous continuing education,, submitting financial plans for peer review, and providing holistic financial services.
If you’re interested in hiring a financial planner to help you transition into retirement, manage cash flow, maximize your tax strategy, or meet any number of goals, then consider working with a fee-only financial planner like Bartley Financial, which has locations in Andover, MA and Bedford, NH.
The Bartley Financial team provides financial advice that is tailored to the investment goals and objectives of their clients and informed by wealth of experience. At Bartley Financial, we are dedicated to delivering real value to clients, which entails adhering to high professional and ethical standards, as well as providing complete transparency when it comes to our fee-only financial planning for individuals and business owners.
Contact us today to learn more about how our services, philosophy, and fee structure can benefit your financial future.