The choice of a financial advisor is a pivotal decision in anyone’s journey. In today’s ever-evolving financial landscape, the distinctions between different types of advisors have never been more critical. It comes down to how they earn their money: a fee-only model, fees and commissions, or a commission-based model.
As David Creekmore, president of Lifetime Financial, puts it, “Fee-only eliminates the huge distortive incentive of product sale commissions, but it’s hardly free from conflicts of interest.” In other words, this model may provide clarity in terms of costs; however, the absence of commissions doesn’t guarantee the best financial advice.
Whether you’re searching for your first financial advisor or your next one, let’s explore the fee-only model and the alternatives so you can be better prepared to choose a financial advisor who fits your financial needs.
The fee-only approach to financial planning has gained traction among individuals looking for transparent, objective advice. Many with a certified financial planner (CFP) professional certification are fee-only, and it’s the structure preferred by the National Association of Personal Financial Advisors.
Fee-Only Advisors’ Primary Focus Is Your Best Interest
A cardinal advantage of working with a fee-only fiduciary financial advisor is unbiased advice. “Fee-only advisors will always act in your best interest, as there is no financial incentive to act otherwise,” explains Caleb Vering, associate wealth advisor for Farnam Financial.
For example, consider a 40-year-old executive who aims to achieve a balanced portfolio, minimize taxes and plan for a child’s college education. A fee-only advisor will give them unbiased advice without pushing them into specific products for a commission. Over time, they develop a rapport as the advisor conducts regular portfolio reviews to adjust strategies that align with the executive’s evolving needs and market conditions.
You Clearly Understand What You’re Paying For
The fee-only model has straightforward pricing that lets you know right from the beginning how much you’ll pay for the professional guidance you’re receiving. “Fee-only advisors only get paid directly from the client,” says Eric Rodriguez, a CFP professional and founder of WealthBuilders LLC. “They typically get paid a flat fee for their service, similar to how an attorney or accountant would.”
Fee-only advisors can offer different services and specialize in different areas. By being selective, you can pay only for what you need, Vering says. “If you don’t want ongoing service, you can pay for a flat-fee financial plan. If you want intermittent service but not portfolio management, you can hire an advisor for hourly service.”
Fee-Only Advisors Take a “Big Picture” Approach
Beyond mere investment advice, fee-only advisors adopt a holistic approach. Instead of just focusing on where to invest your money, they consider your overall financial health, from retirement planning to estate strategies.
Take, for instance, a couple nearing retirement. A fee-only advisor might not only advise on their 401(k) allocations, but also provide insights on tax-efficient draw-down strategies, Medicare considerations and estate-transfer tactics to ensure a smooth financial transition into their golden years.
While the fee-only advisory model brings undeniable benefits to the table, no system is without its drawbacks. Evaluating these potential downsides alongside the advantages is essential to making an informed choice.
Window for Biases and Errors
The fee-only label doesn’t grant automatic immunity from mistakes. Advisors are human and may inadvertently harbor biases or make oversights in their recommendations. As Jason Laux, owner of Synergy Group in White Oak, Pennsylvania, points out, “A downside of fee-only advisors is that bias still exists within many of those relationships.”
For example, advisors might inadvertently lean toward more complex financial strategies that highlight their expertise and the value of their service, even if a simpler approach could serve your needs just as effectively. Creekmore suggests another possible bias, saying, “Most fee-only models are based on AUM (assets under management) and are strongly incentivized to have clients over-save and keep money in the advisor’s brokerage control, discouraging real estate investing or annuities because they will reduce the advisory fee.”
Not Always the Most Affordable Option
Transparency doesn’t always equate to affordability. While the fee-only model offers transparency in terms of charges, the upfront costs might be higher than some expect. New or younger investors, in particular, might find the upfront fees of some fee-only advisors a significant barrier. “It is worth noting that you can find advisors who charge by the hour or do one-time projects,” says Rodriguez. This approach can make the service much more affordable.
You May Not Get Access to Some Services or Products
Although fee-only advisors cover a broad range of financial topics and investment strategies, there are certain areas where their expertise might not be as deep. For instance, when it comes to specialized insurance products or annuities, a fee-based advisor might make more sense (see below). It depends on what you want an advisor to do for you and can sometimes require you to consult additional professionals for guidance on specific topics.
While fee-only financial advisors present a clear, client-focused model, they are not the only option in the vast financial advisory landscape. “When choosing a financial advisor, one of the first decisions to be made should be the type of advisor,” says Paul Culbreth, a CFP professional and principal of Culbreth Wealth Management.
Here are some other popular advisor types and how to determine when they might be a suitable choice:
Fee-based advisors differ from fee-only advisors, as they earn both set fees paid by you and commissions on the products they sell you. “They are duly registered advisors,” explains Culbreth. This choice can make sense if you’re looking for a wider range of services or insurance needs. “Fee-based advisors can write insurance products (typically for a commission), whereas fee-only advisors do not,” says Culbreth.
If a financial advisor has a commission-based fee structure, their earnings come primarily from the financial products they sell you. A commission-based advisor can help if you’re looking to make a specific, one-time investment, such as purchasing an insurance policy or annuity. Culbreth cautions against buying insurance before completing a financial plan “to ensure the amount of coverage lines up with the level of need.”
Choosing an advisor isn’t about pinpointing the “best” type, but the most appropriate for your unique situation. “What matters most is the advisor’s competence, the level and quality of service, and the total lifetime cost you will pay,” says Creekmore. “These are difficult things to find out about advisors, which is why referrals continue to be the largest source of new business.” When looking for an advisor, remember these key considerations:
Financial goals and complexity. If you have more complex financial goals, like estate planning, tax optimization and diverse investments, a fee-only or fee-based advisor could be most beneficial.
Budget. Fee structure is crucial to your decision. While fee-only advisors offer transparency, their upfront costs can be high for some. On the other hand, commission-based advisors might seem cost-effective, but they require you to be vigilant about potential conflicts of interest.
Personal comfort. Your relationship with an advisor is built on trust and communication. You may cherish face-to-face interactions for direct discussions, or lean toward digital or phone consultations for convenience. Assess your preferred communication method when choosing an advisor.
Matching strategies. Asking the right questions is crucial in your search for an advisor. Knowing fee structures, investment strategies and potential conflicts of interest can help you gauge their expertise and alignment with your needs, while also fostering transparency and trust.
The journey to financial security and growth is deeply personal and multifaceted. Choosing the right advisor is not only about fees and services, but understanding the relationship’s depth and transparency. By asking the right questions, understanding the differences in advisory models and aligning your personal preferences with an advisor’s approach, you can pave the way for informed, effective financial decisions.
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