What is a Fee-Only Financial Advisor?
Fee-only advisors are paid a flat fee for doing their work. These could be flat hourly rate to develop a financial plan or answer a financial question. This could also be a project based fee, meaning they quote you a flat fee to complete a project for you. Finally, if the advisor is managing your investments, they could charge you an Assets Under Management (AUM) fee, which is typically a percentage of your assets under management.
An example of an hourly fee would be to charge you to develop a financial plan. If a planner quotes you $100 per hour for an estimated 15 – 20 hours of work, the fee would be $1,500 – $2,000 depending on the number of hours incurred to complete the plan.
An example of a flat fee project would be to charge you $2,000 to develop a financial plan for you, regardless of the amount of time it takes to complete. In both cases it is a fee-only arrangement, which means that you are paying a fee for a specific service.
An example of an AUM fee would be to charge you 1% of your assets under management. For example, if you have $200,000 of assets under management, they would charge you a $2,000 annual fee. This type of arrangement might also include some other work, such as an annual financial plan checkup.
What is a Fee-Based Financial Advisor?
The Term Fee-Based means that the client typically pays a fee to the planner, but that is only the beginning. That fee is the base fee. The planner can also get paid a number of other ways in addition to the base fees. These could be commissions, brokerage fees, and other financial incentives offered by third parties to sell their products or services.
For example, a Fee-Based financial advisor might also get compensated by selling you insurance products. If you buy an insurance product, they would often get a commission for selling you that product.
This is different than a fee only model as the fees are not clearly defined up front.
Benefits of Fee-Only Financial Planners
One of the most significant benefits of fee-only financial advisors is that their fee-only model sets them up to be more objective in serving their clients. They are hired to do a job for a flat fee, and you expect them to do that to the best of their ability. They should not have a conflict of interest as they might otherwise have by selling you high commission investment products, for example.
Their fee model is clear and transparent. They quote you a fee up front, and you pay for the services rendered. There are no hidden fees.
Fee only planners are independent. This means they are not working for a bank, insurance company, or other financial products company with incentives to sell you a product or service.
A fee only planner should generally be the least expensive. This is because you are only paying for a specific service.
These planners have a fiduciary duty . This means that they are obligated to do what is in your best interest, not theirs!
Fee only planners should have more comprehensive services and options since they won’t be limited by the investment choices of a sponsored bank or insurance company.
Drawbacks of Fee-Based Financial Planners
Fee-Based Financial Planners have a number of drawbacks.
First, the compensation structure for them is not clear up front. This is because it depends on what investment products you are sold later. Each of them likely has a different cost structure attached to them.
Second, they have potential conflicts of interest. This is because fee-based advisors are compensated by another company for selling you products or services. This put them in a precarious position of deciding whether to put you in products that are best for you or more lucrative for them.
These fee-based advisors or commission-based advisors frequently don’t meet the fiduciary standard, which means they are not always acting in their clients’ best interest. Instead, they are only obligated to meet the weaker suitability standard, which means they just need to put you in a suitable product, not necessarily the best product for you. Due to this conflict, it is inherently difficult for this type of advisor to provide unbiased advice.
Napfa’s Position
The National Association of Personal Financial Advisors (NAPFA) requires their members to be fee-only planners. NAPFA members are not allowed to receive payments from any other sources other than their clients via the fee-only model. Referral fees, commissions from brokerage firms, insurance companies or mutual funds are not allowed. You can read more about this at Napfa.org.
What type of planner do you want to help reach your financial goals?
Do you want your planner to have a fiduciary responsibility or are you okay with the weaker suitability standard?
Do you want an independent planner providing objective advice or one selling products for an insurance company or investment company?
I think you know the answer.
DIY investors have an advantage
Do It Yourself (DIY) investors have an advantage if they are comfortable making their own investment decisions. This is because they can avoid paying the ongoing financial advisor cost of the Assets Under Management (AUM) Fee structure. They can also avoid the fee-based planning model.
Instead, DIY investors can just hire a fee-only planner to provide targeted advice or a periodic update to their financial plan. I have done this a couple of times and it works great. I pay a flat fee to get a comprehensive financial plan. There are no strings attached and I have a plan I can refer to whenever I wish.
Even if you are very comfortable being a DIY investor, I highly recommend getting a fee-only planner to review your situation and goals as part of a comprehensive plan. We all have blind spots in our knowledge base, which is why it is beneficial to have an independent, unbiased planner provide you with recommendations and insights.
What to do if you are not a DIY investor?
If you are not comfortable handling your own investments, the right financial planner for you is likely also at a fee-only (not “fee based”) firm. They have a legal obligation to do what is in your best interest and will not be given incentives to sell you life insurance, get brokerage commissions, or sell you specific financial products that have high fees.
You may have to accept an AUM (Assets Under Management) model from the fee-only planner, but that is the ongoing cost you may have to bear if you would like a planner to handle your investments on your behalf. Also, to ensure that your planner is well qualified for the job of providing financial advice, you should make sure they are a certified financial planner (CFP) which means they have passed an exam and have a minimum amount of job experience.
You should also always ask if they are a fiduciary, just to make sure. Not only that, you should ask if they can provide that to you in writing. Your financial future is too important to take chances!
Two fee-only firms that are worth looking into are the XY Planning network and the Garrett Planning Network. Both are fee-only firms that have lots of financial professionals with good reputations for providing advisory services that meet a variety of financial needs.
Executive Summary
- Fee-Only advisors charge a flat hourly rate, project fee, or assets under management fee
- Fee-Only advisors are independent and are not paid to sell investment products
- Fee-Based Advisors get paid from third parties to sell you insurance, investment and other financial products
- Fee-Based Advisors have a conflict of interest as they might put you in products that benefits them more that it benefits you
- DIY investors can save a lot of money by paying a fee-only planner just to put together a financial plan and not to manage investments
- Those not comfortable making their own investment decisions can still benefit by using a Fee-Only planner under the Assets Under Management Model
- The planner you choose should be a CFP and should also give you their fiduciary pledge in writing.
