You’ve made the decision to hire a financial advisor. You’ve reached a stage in your life when you realize that you should have some professional guidance when it comes to your finances. Maybe you’ve hit a milestone birthday and realize that retirement is going to be here before you know it and you need to get things in order. Maybe you are going through one of the many other transitions that life brings our way. Those transitions include things like marriage, divorce, the birth of a child, the death of a loved one, the loss of a job or the start of a new one—and there are many others. No matter the transition, you will find they all have financial implications and consequences. And you’ve decided that you would be better off not going it alone.
So, where do you start? You have a lot of different “types” of advisors to choose from, and it can get confusing. Most advisors work for a bank, a brokerage firm, or an insurance company. But if you had a choice, wouldn’t you want the advisor you hire to work for you? You certainly do have a choice, and you will find that a “fee only” advisor fits that bill.
You see, a fee-only financial planners can receive compensation from only their clients. They get no commissions of any type. They do not have ties to any specific companies, so they are able to offer you a wider array of solutions for your financial planning needs. Fee-only planners are compensated directly by you for advice, implementation, and/or the ongoing management of your assets—and from no one else.
Fee-only planners are held to a higher legal standard for the service they provide. A fee-only planner is, by law, held to a fiduciary standard. That means that they must always act in your best interest. Now, you might have thought that all advisors are required to act in your best interest. That’s the way that I believe it should be, but unfortunately, it’s not the case. Most advisors are merely held to a “suitability” standard, meaning that they only have to make sure that a certain investment or strategy is suitable for you. For example, you could have two financial products that are “suitable” for your situation, but one pays a higher fee or commission to the advisor. The non-fiduciary advisor is within legal bounds to offer you the one that pays them the most. Not so with a fee-only advisor.
As I was writing this article, I received notification of news that really drives home the point made in the previous paragraph. On Monday, March 11, the SEC announced that almost 80 investment advisory firms agreed to pay back more than $125 million to clients who were sold higher-cost mutual funds without being made aware of less expensive options. You can read the story here.
Another thing that sets fee-only planners apart is that there are no long-term commitments when working with them. There are no back-end loads, surrender charges, or other contractual issues that make it difficult for you to change or move your accounts. In fact, a fee-only advisor must re-earn your business every month, quarter, or year to keep earning those fees.
Let’s take a minute to describe the fees you might pay working with a fee-only planner. The fees will be directly related to the level of services you require. That means that if you need help with only one issue, you may pay an hourly fee to the advisor, like how an accountant or attorney is paid. If you are looking for an ongoing relationship to help with the implementation and monitoring of your plan, you may pay a flat annual fee based upon the complexity of your situation. If you want the advisor to provide ongoing investment management and monitoring, you may pay a fee based on the amount of your assets.
At this point, it’s important to point out that “fee based” is not the same as “fee only.” Fee-based advisors may manage assets on a fee basis, but they are still able to collect commissions on other financial products, like annuities or other insurance products. My belief is that the term “fee based” came about as a marketing strategy to confuse the public. However, fee-based advisors are not necessarily bad, just as not all fee-only advisors are good. In fact, there are good advisors who are compensated by commission. What’s important is that you understand how you are paying for the services you are receiving.
So, now that you’ve decided to hire an advisor, and the brilliance of this article has convinced you to make sure they are fee only, how do you find one? The National Association of Personal Financial Advisors (NAPFA) is a professional organization of advisors who are CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals paid on a fee-only basis and who sign an annual fiduciary oath to always work in the best interest of the client. NAPFA offers a Find an Advisor search engine on their site.
It’s your financial future. Make sure you are getting the best advice to help you get there.
Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.