Most people want to help ensure that the financial advice they receive is unbiased and truly in their best interest. A financial advisor’s compensation structure can significantly impact their recommendations. Fee-only financial advisors are independent of financial services firms (such as brokers or insurance companies) and are legally held to the fiduciary standard. A fee-only advisor’s fee amount and structure are transparent and clear; the advisor works only and directly for you. In this respect, there is no economic benefit or motive to recommend certain financial products over others. This helps ensure that the primary concern is providing financial guidance that prioritizes their client’s best interests rather than seeking to profit through product sales. If an advisor makes income from any sources other than fees directly paid by the client, the advisor should not be considered ‘fee-only’. Working with a fee-only advisor can help clients avoid the sales pressure connected to commissioned sales of mutual funds, annuity products, insurance, and other products.
How Much Will a Fee-Only Financial Advisor Cost?
Investment management fees from a fee-only advisor are often based on an assets under management (AUM) schedule. For example, you might pay 1% of the value of account investments under your advisor’s management. Other times, asset-based fees are calculated according to a graduated table of rates. In this instance, your asset management fee will decrease as your assets under management increase to certain thresholds. An AUM fee structure aligns advisors to focus on long-term results for their clients since their performance and earnings are intertwined.
All advisors, investment advisors, robo-advisors, asset managers, insurance agents, or financial planners are compensated based on the complexity of your situation. Someone who has accumulated assets and has increased complexities (tax planning, retirement income planning) in their financial profile can expect to pay more per year in fees versus someone who is earlier in their asset accumulation phase. Fees can vary based on the advisor, the type of work they do, the advisor’s background and experience, and their location.
In addition to investment advice, you should receive comprehensive financial planning advice that includes reviewing and assessing all your assets such as real estate, cash flows, insurance coverages, 401(k)s and other retirement-savings plans, annuities, and tax planning. Financial planning that requires team input from other professionals, such as estate-planning lawyers, will typically cost more.
How Can A Fee-Only Advisor Save Me Money?
A good fee-only advisor will review your existing investment accounts (including your IRAs, retirement plans, and brokerage accounts) and search for ways to reduce costs, fund management fees and expense ratio, and transaction costs on your existing investments. Many people are unaware they are paying high mutual fund fees of over 1% year-over-year. In many cases, the advisor can find thousands of dollars in high-fee funds and excessive capital gains and distribution taxes that can be reduced by over 50% by substituting and replacing your existing mutual fund investments. These savings can help offset the cost of the services and advice you receive from working with a fee-only financial advisor.
In addition, a fee-only advisor can help you evaluate a range of insurance options (such as term life or whole life insurance, long-term care insurance, disability insurance, malpractice insurance, home and auto insurance, umbrella insurance, etc.) that you may wish to purchase and need unbiased advice on. Often, a fee-only advisor can also help you analyze real estate purchases including primary and vacation or rent properties and related cash-flows, expenses, and financing. This can add value for a client and bring a new perspective to your decision-making process.
Many research studies have indicated that making sound financial planning decisions and working with a good financial advisor can generate better investment returns and more income on average. So, if you want an ongoing and continuous relationship, a fee-only investment management relationship may be the best option.
Are Fees Always Based on a Percentage of Assets the Advisor Manages?
No. While an investment management fee (AUM percentage) based on assets managed is typical, there are different ways to pay a fee-only financial advisor. Based on your situation, you can collaborate with an advisor who can provide a financial plan for you to self-manage your investments (if you feel able to do so and have a good understanding of what will be involved). This instance may involve a flat fee for a one-time plan or evaluation. Some advisors may work on a flat fee or an hourly rate basis for comprehensive financial planning, retirement planning, or consulting services.
How Do Brokerage Transaction Costs Factor In When Working with a Fee-Only Advisor?
Typically, when working with a fee-only advisor, you will pay a brokerage firm some fees to be your custodian and provide the platform to execute transactions. A good advisor, however, can benefit you by working hard to minimize or eliminate those costs. A fee-only fiduciary advisor will ensure that your money is held at a firm with brokerage fees that are moderately priced relative to the market and other alternatives. Many advisors and planners are eligible for discounts you may not get on your own. Since a fee-only advisor only works for and gets paid by you, his or her goal is to reduce the brokerage and total investment-related expenses. Independent fee-only advisors must be 100% transparent about all fees as they are legally held to a fiduciary standard.
My Current Advisor is Not “Fee-Only”. Is That Something I Should Be Very Concerned About?
The short answer is that there are many excellent advisors with high integrity who operate under models that are not “fee-only” or “flat fee.” There are so many different types of “financial advisors” in the marketplace, there’s no wonder that many people lump them all together into one. Keep in mind that “fee-based” is not the same thing as “fee-only,” as “fee-based” advisors can still receive commissions or kickbacks.
Be aware that it can be challenging to determine precisely how much you’re paying when your advisor’s compensation is buried in mutual fund sales load charges, commissions from insurance and annuity products, third-party fees that may be paid to an advisor to encourage them to recommend specific investments, or mark-ups from bond positions you may be allocated. Unfortunately, your quarterly brokerage account statements may not be as transparent as you would like in reflecting the total fees you are paying.
You should be clear on how you’re being charged and comfortable with the cost compared to the level of service you receive. You should ask yourself, Is my advisor recommending a product because it’s truly the best investment for me or because it generates a commission for her or his firm? There are generally numerous product options that can make sense to compare, so not being tied to the products of a specific firm and being able to choose from any product that is available in the marketplace can prove to be a big advantage.
It is also important to be careful with advisors who specialize in a single financial product or service. They are often not qualified to provide comprehensive, across-the-board advice on your financial life. Also, most of these advisors work on a commission-based compensation structure, which is the exact opposite of a fee-only arrangement.
How Does the Compensation of a Fee-Only Financial Advisor Differ from a Fee-Based Financial Advisor?
Fee-based financial planners earn a fee for their services, which the client pays. In addition, they may also receive additional compensation from the sale of certain financial products, such as load mutual funds or annuities. Fee-based financial planners must only recommend investments to clients that meet a suitability standard and are not typically fiduciaries. A conflict of interest is created because the fee-based advisor may have an economic incentive to recommend products they are rewarded for selling. This can result in recommended products and investments that are suitable based on your goals and risk profile but not necessarily as advantageous for you as other available options in the marketplace. If you’re interested in finding financial guidance, understand that this nuanced difference may be significant since fee-based allows for a conflict of interest from commission compensation, whereas fee-only does not.
Are All Certified Financial Planners (CFPs) Fee-Only Advisors?
The CFP Board does not require CFP® professionals to be “fee-only” and not accept commissions. According to the CFP Board, a CFP® professional may represent his or her or the CFP® professional’s firm’s compensation method as “fee-only” only if: (1) The CFP® professional and the CFP® professional’s firm receive no sales-related compensation; and (2) related parties receive no sales-related compensation in connection with any professional services the CFP® professional or the CFP® professional’s firm provides to clients.
