We all need a little help with our finances sometimes. Especially as we get older, and our finances become more complex. Just think of the financial planning that retires, sending kids to college, investing for income, estate planning, etc. It only makes sense to consult a professional about these matters.
Even if it’s a little help figuring out your budget, or making a plan to reduce your debt, financial planning services are beneficial. But who should you approach – a financial advisor, a certified financial planner? It’s important to understand that not all financial planners are the same. Financial planners have different experience levels and charge fees at different levels.
This article will explain the benefits of dealing with a fee-only financial planner. If you are looking for someone to help you and who has your best interests in mind, you should consider a fee-only financial planner.
What are Fee-Only Financial Planners?
Fee-only financial planners charge an hourly or flat fee for their services. For example, they may charge you $100 per hour, or more, to create a detailed financial plan. When it comes to managing your investments, they may charge a flat fee, say $1500 per year. Or, they may charge you a fixed percentage based on your overall portfolio value or assets under management (AUM).
For example, if you have a managed portfolio of $250,000 and their fee is 1%, your cost is $2500. In this case, it’s in your planner’s best interest to help you grow your portfolio, as it will equate to more money in their pocket, not just yours.
What you get for that fee will vary depending upon the planner and their respective services. Fee-only planners lay out the costs so that you know exactly what you are paying for and how much.
Commission-Based Financial Planning
Historically, many financial planners have been compensated through a commission-based model. This means that they receive a commission on the sale of a mutual fund. Some funds pay a better commission than others, leading to an inherent conflict of interest. A commission-based planner who places more trades or chooses higher MER mutual funds can make more money to the detriment of their client.
Even though the fund might not be what you need for your portfolio, a commission-based planner might steer you toward what offers the most significant commission. Paying these higher hidden expenses could cost you more in the long run, especially if you’re not on the financial path that’s right for you.
You have to be wary of commission-based financial planners because they don’t get paid based on how well your portfolio is doing; they are paid based on what they are selling you. It’s more about making sure their bottom line is bigger in the long run than it is making sure that you have a portfolio suited to your needs and risk tolerance. Between the possible under-performance and the higher MERs, you could be leaving tens of thousands of dollars on the table over time.
While I’m sure many commission-based financial planners do not let this sway their decisions, going with a fee-only financial planner, at the very least, gives you peace of mind that both you and your advisor are working toward YOUR goals.
Advantages of a Fee-Only Financial Advisor
There isn’t much in life that is exclusively advantageous. But there are many advantages of choosing fee-only financial advice over the alternative. Let’s take a look at the positives of fee-only financial planning:
Freedom from Some Conflicts of Interest
Because a fee-only planner’s compensation isn’t coming directly from the sale of investment products, the investor can rest assured knowing that their investment advisor isn’t making choices based upon what will enhance their profitability. It doesn’t guarantee that they’re making the right decision, but some conflict of interest is removed.
Objectivity
Fee-only planners can act as objective financial partners. They are less likely to act with bias about your financial situation because they aren’t benefiting based on the types of investments you choose.
Disadvantages of a Fee-Only Financial Advisor
Fee-only financial advisors can be costly, and have other conflicts of interest, even if they don’t pertain to the sale of specific investments. Here are a couple of potential drawbacks to dealing with a fee-only planner.
Can be Expensive
If you hire an advisor who charges a flat fee of $2500 for annual financial planning services, regardless of portfolio size, the cost is certainly not equal for everyone. If you have a $500,000 portfolio, you’re getting a great deal – a $2500 fee equates to 0.50%, which is very competitive for professional financial advice. But what if your portfolio is only $50,000. In that case, the fee is 5% of the overall portfolio, and certainly not worth it. The fee is transparent, but far too costly to consider for someone with a smaller portfolio size.
Potential Conflicts of Interest
I may sound like I’m contradicting myself here. Didn’t I previously mention that fee-only planners are free from conflicts of interest? The answer is yes for some, but not all. Conflicts of interest can still exist. If your planner charges a fee on the percentage of assets under management, they may steer you away from any decisions that could reduce your overall portfolio value.
For example, let’s say you have a $200,000 portfolio, at 1%, and you wish to withdraw $50,000 from your investments to purchase a new SUV. Your planner might be tempted to recommend that you borrow the money via a car loan, instead of withdrawing from your investments – even if paying for the vehicle with cash is the smarter choice.
Fee-Only vs. Fee-Based Planners
You may have heard of a fee-based financial planner. While the name sounds familiar, a fee-based planner is very different from a fee-only planner. For starters, under the fee-only model, the planner is paid directly by the client. They are not compensated by the investment funds, and they don’t earn a commission every time they place a trade. A fee-based financial planner may charge a fee directly to their client, but they can also receive incentives, in the form of commissions, from the investment funds that they sell.
In addition to compensation, fee-only financial advisors have fiduciary responsibilities. That means that they must put their client’s best interests first when making any investment decisions. Fee-based financial planners don’t share the same responsibility. Instead, they have a responsibility to ensure that the investment they are purchasing is considered “suitable” for the client. A suitable investment is one that aligns with the client’s net worth and risk tolerance – their ability and willingness to take risks. Determining that an investment is suitable is not a bad thing, but it’s a lower standard than what’s required of a fiduciary.
Fee-Only Planners: How to Choose the Right One
Of course, you shouldn’t just hire the first planner to come along, even if he or she works on a fee-only basis. You need to make sure that your financial planner understands your situation and can make reasonable suggestions.
One of the best ways to start figuring out who to hire is to ask around. Ask family, friends, and co-workers for the names of fee-only planners. Then, research their credentials. Find out if they belong to a professional organization, and if they are properly licensed to offer the services that they claim.
Narrow your list down to three or four planners near you, and schedule a sit-down. Many planners will offer you a free half-hour or hour initial visit to look at your situation. Get a feel for each planner’s style. Ultimately, you need to feel comfortable with your financial planner, so this “interview” can be a good way to determine who you will work well with. Ultimately, the right fee-only financial planner can help you get your finances on track, and help you plan for a successful future.
