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 make a significant difference in the recommendations they make. Fee-only financial advisors are independent of brokerage firms or insurance companies and are legally held to the fiduciary standard. The fee amount and structure for a fee-only advisor is transparent and clear; the advisor works only and directly for you. In this respect, there is no incentive to recommend certain financial products over other financial products. This helps ensure that their primary focus is on providing sound financial guidance that is in their client’s best interest rather than seeking to make a profit through product sales. If an advisor makes income from any sources other than client fees, the advisor is not ‘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?
The fees you’ll pay for investment management services from a fee-only advisor are often calculated as a percentage of assets under management (AUM). For instance, you might pay 1% of the value of account investments that are 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 encourages advisors to focus on achieving long-term results for their clients since their earnings are tied to their performance.
All advisors – whether they’re investment advisors, robo-advisors, asset managers, insurance agents, or financial planners – get compensated based on how complex your situation may be. Someone who has accumulated a portfolio of about $2 million and wants ongoing investment management with portfolio rebalancing, tax planning, plus retirement income planning, can expect to pay more per year in fees versus someone who is earlier on in their asset accumulation phase. Fees can vary based on the advisor, the type of work they do, the advisors background and experience, and their location.
In addition to investment advice, you should receive financial planning advice that should be comprehensive and include an evaluation of all your assets such as real estate, cash flows from a small business, insurance coverages, 401(k)s and other retirement-savings plans, annuities, as well as 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 all of your existing investment accounts – including your IRAs, retirement plans, and brokerage accounts – and search for ways to reduce unnecessary expenses, fund fees and transaction costs on your existing investments. Many people are not aware 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 alone can help you cover the cost of the advice you get 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. In many instances, 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 common, there are different ways to pay a fee-only financial advisor. Based on your situation, you may be able to collaborate with an advisor that 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 charge a flat fee or an hourly rate for comprehensive financial planning, retirement planning or consulting services.
How Do Brokerage Transaction Costs Factor In When Working with a Fee-Only Advisor?
Typically you will pay a brokerage firm some fees to be your custodian and provide the platform to execute transactions, etc. when working with a fee-only advisor. A good advisor, however, can benefit you by working hard to make sure those costs are minimized or eliminated. A fee-only fiduciary advisor will make sure your money is held at a discount brokerage firm that has brokerage fees which are fairly priced. Many advisors and planners are eligible for discounts that you may not be able to 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 that 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 difficult to determine exactly 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 certain 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 clearly 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 that specialize in a single financial product or service as 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 are paid a fee for their services by their clients, but may also receive additional compensation tied to the sale of certain financial products, such as mutual funds or annuities. Unlike fee-only advisors, fee-based financial planners are not typically fiduciaries and are instead only required to recommend investments to clients that are suitable. Because the fee-based advisor may be incentivized financially to place clients in products they profit from, it creates a conflict of interest. As a client, you may end up in investments that are suitable based on your goals and risk profile, but not necessarily the best for you based on all of the options in the marketplace. If you’re interested in finding financial guidance, understanding that this nuanced difference may be significant since fee-based allows for the possibility of a conflict of interest from commission compensation, whereas fee-only does not.
Are All Certified Financial Planners (CFP’s) Fee-Only Advisors?
No, 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.
