Fee-Only, Fiduciary, Independent
You’ve made the important decision to partner with a financial advisor on your journey to financial success—congratulations! This is only the first step, however. You may have started researching your options and are a little overwhelmed and confused. We understand. There are many advisors to choose from, not to mention all the various terms and jargon. In your research, you’ve probably come across the term “fee-only.” This term is usually used to describe registered investment advisors (RIAs) who provide services and planning that, by law, can only be in your best interest. This is an important distinction to look out for when searching for a financial professional.
But what does “fee-only” mean and why is it important? We’ll discuss this below, as well as outline the different types of compensation for financial advisors, highlighting the important features of using a fee-only wealth management company, including why we at Strategic Financial Planning pride ourselves on offering our services this way.
How Advisors Get Paid
To truly understand the value of a fee-only advisor, it’s important to first understand the different ways advisors can get paid. The three most common methods include:
Commission-based
Fee-based
Fee-only
Commission-based advisors don’t charge fees to their clients. On the surface, this model sounds great. But these advisors have to get paid somehow, so instead, they earn commissions from financial and insurance products they sell to their customers. Even if they mean well, commission-based advisors may be more motivated to sell investment and insurance products that will earn them the most money, rather than providing advice that is solely in the best interest of the client.
Fee-based advisors may sound like they’re fee-only, but they can also make commissions from financial products and transactions. In addition to charging their clients a fee, they earn a percentage of their revenue from selling products on behalf of brokerage firms, mutual fund companies, or insurance companies, thus placing them at the same risk for conflicts of interest as commission-based advisors.
Fee-only financial advisors are paid directly by their clients—and only by their clients. They don’t receive any type of kickbacks or commissions for recommending certain securities, investments, or insurance products. Their fees are typically structured as hourly or project-based fixed fees or as a small percentage of the assets they manage, known as assets under management (AUM) fees. Because fee-only advisors only get paid by their clients, their incentives are usually better aligned with the clients they work for than commission-based or fee-based advisors.
Some Benefits of Working With a Fee-Only Financial Advisor
The National Association of Personal Financial Advisors (NAPFA) believes fee-only advisors are the most transparent and unbiased advisors you can come by. They typically have one or two designations: either Investment Advisor Representative (which doesn’t necessarily indicate that the individual advisor has accomplished a particular level of professional certification or academic rigor) and/or CERTIFIED FINANCIAL PLANNER® (which is widely regarded as the highest standard of financial planning designations). If you’re in the market for a financial advisor, here are three reasons why you should choose a fee-only CFP® professional:
1. Reduced Conflicts of Interest
No matter how pure an advisor’s intentions are, it can be difficult to provide unbiased recommendations when they know they’ll get a kickback or commission. But this isn’t the case for fee-only advisors. They have no incentive to push certain products because they don’t sell any products at all. They’re solely compensated by you. Fee-only advisors can still have conflicts of interest that may be tied to the value of investments that are managed, but they are required to clearly disclose those to clients.
2. Fiduciary Commitment
Fee-only advisors are fiduciaries at all times, which means they are legally and ethically obligated to act in your best interest and to disclose any potential conflicts of interest. They are loyal to you and provide objective financial advice based on your unique situation and goals. CFP® professionals have additional fiduciary obligations, and NAPFA advisors also take a fiduciary oath in order to further demonstrate their commitment to working only in their clients’ best interests.
3. Objective Advice
It’s easy to act on emotion when you’re dealing with your own money. For example, if there’s talk of a stock market crash, you may want to change your investing strategy. Or if a family member needs to borrow money, you may be tempted to help them out even though you know giving to them would jeopardize your financial security. You also want to live a comfortable life during retirement, but you’re not sure if you’re on track. In situations like these, it’s nice to have someone you can go to for objective advice.
We’re Here for You
At Strategic Financial Planning, we have our clients—and our clients only—in mind. We pride ourselves on transparency and avoiding biased advice whenever possible. We give our clients our undivided loyalty and are dedicated to helping them reach their financial objectives.
Whether you have a specific financial concern or need help developing a solid financial plan, we’re here to guide you every step of the way. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!