Fee-Only
How you pay a financial advisor for their services is an important consideration. How you compensate an advisor dictates their ability to provide you with objective advice.
How do financial advisors get paid?
There are three basic models for how financial advisors are compensated:
Commission
Commissioned financial advisors are paid when they sell mutual funds, life insurance policies, and annuities to their clients. For example, if you work with a commissioned advisor and they recommend purchasing a whole life insurance policy, they may receive all the premiums you pay for the first few years while that policy is in force. Many commissioned advisors have quotas from their firms that require them to sell a certain number of products in a given year. Commissioned advisors are incentivized to sell you certain products which creates a potential conflict of interest. When compensation is directly tied to an advisor’s recommendation, how can you be sure a life insurance policy or an allocation of mutual funds are in your best interest or in their best interest?
Fee-only
Fee-only financial planners are paid directly by the client for the advice that they give. Fee-only planners do not receive commissions or compensation from third-party agreements. Fee-only advisors are incentivized to act in the best interest of their client. All of the advisors in the Spokane Financial Advisors Network are subject to a strict fiduciary standard which obligates them to ethically and legally act in their client’s best interest. Fee-only financial advisors may be paid hourly, as a retainer, as a percentage of assets (AUM), or as a flat fee, depending upon the planner you choose.
Because fee-only advisors do not sell products, they have access to a wide variety of financial tools to help you achieve your goals.
Fee-based
Fee-based advisors are a hybrid of the other two options. They often charge fees for investment management and they also receive commissions for selling financial products like life insurance. Similar to commissioned financial advisors, they are not usually required to disclose the amounts of commissions or other conflicts of interest. It’s important to ask an advisor if they are fee-based or fee-only. The names are similar but fee-based and fee-only are very different.
Why should I hire a fee-only financial planner?
The reality is that most financial advisors are not legally required to act in the best interest of their clients. Though many commissioned financial advisors do act in their clients’ best interests, the potential for abuse exists. Working with a fee-only financial planner ensures that their incentive is aligned with what is best for you and helping you to reach your goals.
The National Association of Personal Financial Advisors (NAPFA) has helpful resources for consumers regarding the benefits of working with fee-only planners which you can find by clicking on this link.
How do fee-only financial planners charge clients?
There are a few different ways that fee-only financial planners charge their clients:
Hourly or as a retainer – Many fee-only financial advisors simply charge by the hour for services provided to clients. This model is common for ongoing financial planning services and limited projects.
Assets Under Management (“AUM”) – More commonly for investment managers, they may charge clients a percentage of the investment portfolio that they manage. A fee of 1% per year is a common benchmark, though there are a wide range of options depending on the advisor and the types of services that they include. Fees will often decrease to lower percentages for larger accounts. As a general rule of thumb (if you know what you are being charged) a fee of over 1.5% per year is considered to be quite high.
A flat fee – A simple, pre-defined amount that the client pays for either a project or for ongoing advice. Some advisors charge every client the same amount, some may vary the fee based on the complexity of the client.