It can be challenging to select a financial planner. There’s so much to consider – do they specialize in the financial problems you’re facing? Do they do both financial planning and investment management? How often will you meet with them, and what will your engagement look like?
These are all completely normal things to wonder about when you’re hunting for the financial planner who’s a perfect fit for you. But one question you may not have thought to ask is whether or not an advisor is fee-only.
How Are Advisors Compensated?
Advisors get compensated in a few different ways:
- Commission and client fees
- Fee only
Financial planners who are compensated with commissions, even if client fees are part of their compensation, are essentially getting paid when they sell specific financial products. This could be anything from an insurance policy to a specific investment. Fee-only advisors don’t sell life insurance, annuities, or other investments for commission. Some advisors who are compensated with both client fees and commission call themselves “fee-based” which can be confusing for consumers who aren’t keeping an eye out. If you’re interviewing financial planners and are unsure about how they’re compensated, don’t be afraid to ask. If they sidestep the question, that may not be a good sign.
What Does “Fee Only” Mean?
Fee-only financial planners are compensated only by the fees their clients pay them. This means they’re never going to receive a commission from the sale of an investment, insurance policy, or other financial product. There’s no third party rewarding them for selling you something. Fee-only advisors often are paid in a wide range of ways by their clients from hourly, a monthly or quarterly retainer, a flat fee for a one-time plan creation, or as a percentage of the assets they manage for you.
Fee-only advisors are dedicated to offering fully transparent services to their clients. The financial planning profession often gets a bad reputation – and reasonably so. Many advisors who are compensated on commission are, at the end of the day, salespeople. Even if they have the best of intentions, it’s difficult to determine whether or not their advice is coming from a place that’s putting your interests above their own.
But Doesn’t Every Advisor Have Your Best Interest In Mind?
Unfortunately, no. I don’t want to paint with a broad brush, there are certainly exceptions on both sides of the fee-only line. There are financial planners out there who are excellent people and still receive commissions for their work. There are fee-only advisors who, despite their dedication to transparency, aren’t doing their due diligence when making recommendations.
However, when it comes to selecting what’s best for you, there’s not very much wiggle room. Because there’s no way for you to ever truly know whether an advisor who accepts commissions is looking out for your best interest rather than their bottom line, finding a fee-only planner is your best course of action.
Conflicts of Interest and the Financial Services Industry
The fiduciary standard is something that fee-only financial planners have been abiding by for a long time, and many financial planners in the profession are pushing for more transparent definitions of what “fee only” and “fiduciary” are to help consumers. In short, a fiduciary advisor must put a client’s best interest above their own at all times.
Fee-only advisors are acting in a fiduciary capacity by refusing to accept commissions for their services. Because they’re only compensated by you, their client, you can rest assured that you’re the only one they’re looking out for – not themselves, and not a larger insurance or investment company.
Financial planners who are compensated with commission, even if they’re fee-based, are technically operating under the suitability standard. The suitability standard states that the advisor must advise investments or financial solutions that are suitable for their client. This might mean they recommend a product that they’ll receive commission for selling even though it’s not the best financial solution out there for you.
What About Wealth Habits?
Wealth Habits exclusively offers fee-only financial planning services. I believe in building collaborative relationships and bridging the knowledge gap to empower our clients to make positive financial decisions – and I just don’t see how that can happen if I accept commissions for financial product or insurance sales. I work primarily with physicians, and I often liken my fee-only services and the fiduciary standard to the oath you take as a medical professional.
You swear to do no harm to your patients, and to act in their best interest based on the best of your ability and judgement. The fiduciary standard that I adhere to by only accepting client fees as compensation is not dissimilar: I will always have my clients’ best interest at heart, and I will always advise them to the best of my ability on any given financial planning topic. Want to know more about advisor fees, or the fiduciary standard? Feel free to reach out to me today – I’m always happy to answer any questions, and to make sure you find a financial planner who is an excellent fit for your lifestyle and financial considerations.