When you’re looking for a financial advisor, it can be confusing to figure exactly what kind of professional is the right fit for you. You’ve worked hard to earn your money -- and you don’t want choosing the wrong person to cost you.
One way to ensure that you’re working with someone who has your best interest at heart is to work with a fee-only financial advisor. But before we tell you exactly why we think it’s so important to work with a fee-only financial planner, let’s go over the three ways financial advisors are paid for their work.
How Advisors Get Paid
There are three ways for financial advisors to be compensated for their services: commission, fee-only, and fee-based.
Financial advisors who are paid on commission make their living by selling financial products like life insurance, annuities, and investment products. While they do not charge a fee that directly comes out of your pocket for their advice, they get paid through fees wrapped into the products they sell.
Fee-only financial advisors are only paid by their clients, and receive no other money from commissions or product sales. Some advisors charge an annual fee while others charge based off the assets they manage. Others charge an hourly fee or a monthly retainer, similar to that of a lawyer or an accountant.
Fee-based advisors are compensated by both client fees and product commissions. Fee-based is not the same as fee-only. Fee-based advisors have many of the same conflicts of interest that commission advisors face.
The Fee-Only Financial Advisor Difference
At XY Planning Network, we believe it just makes sense that advisors are paid directly by the client for the financial planning advice they receive, and not through commissions on product sales. There are a number of conflicts of interest between client and planner when compensation doesn’t come directly from the client.
Here are two reasons we believe it’s essential to receive fee-only advice:
Fee-Only Advisors Must Provide the Best Advice
With fee-only planning, when a client wins, the financial advisors wins. When the financial advisor gives great advice, the client remains a client.
Compare this to someone who is compensated by product sales. If one mutual fund pays more to the advisor than the other, the advisor will bring more money home to their family. But as a client, you’ll pay more for the investment even when a comparable product exists. This isn’t a small matter. One of the best predictors for investment performance over the long haul is investment cost.
If your advisor is providing you great advice, they should be compensated for their services. But when a financial advisor is paid directly from the client, the fee is transparent, and the client and advisor’s interest are aligned.
Ultimately, when an advisor works for a broker-dealer that sells investment products, an insurance company, or some other company, their loyalty is to their employer. As a fee-only planner, our loyalty is with you, the client.
Fee-Only Financial Advisors Are Held to A Higher Standard
Fee-only financial advisors are held to a higher standard than other advisors. Fee-only financial advisors are held to a fiduciary standard, where they must make recommendations that are in their client’s best interest. They are sworn to put the client’s interest above their own.
Financial advisors selling products are held to a lesser standard -- the suitability standard. They aren’t allowed to sell you a product that’s wrong for you, but there’s no obligation to sell you the best product. If one product puts more in their pocket, but costs you more, it still meets the suitability standard.
There are many competent, trustworthy advisors doing honest work that operate on a commission or fee-based model. But it may be more difficult to find these professionals on your own.
Choose the Right Advisor for You
Choosing to work with a fee-only advisor is only one aspect of the selection process. You’ll also want to make sure that an advisor is the right fit for you and your life. Ask yourself:
- Does the advisor have experience working with people like you?
- Do you agree with the advisor’s financial philosophy?
- Do you like how the advisor uses technology?
- Do you want to work with advisor directly, or would you prefer to work with a larger team?
XY Planning Network members specialize in working with Generation X and Generation Y clients, regardless of how much money they do (or don’t) have. We help our clients build wealth and create the life they want. Since advisors who are part of the Network work on an on-going basis, all members offer a monthly retainer service like you’d pay for a gym or a cell phone bill to best serve you.
If you’d like to find a fee-only advisor that’s the right fit for you, check out our Find An Advisor Portal. You’ll find experienced, fee-only advisors that work with people like you.
About the Author: Jenna VanLeeuwen is a freelance writer who enjoys helping others make the most of their money to create a life they love. Connect with her on Twitter @JennaVanLeeuwen to join the fun.