If you have decided to invest in getting the help of a financial advisor, then it makes sense to be sure that they have your best interests at heart. With any financial undertaking, the goal is to experience growth and protect your assets. That is why it’s essential to analyze whether your plans for growth align with your financial advisor. First, you need to ask yourself some crucial questions, such as how the financial advisor is getting paid, if they have any financial products they want to sell to you, what their investment philosophy is, and if you can trust it.
A crucial aspect of any investment strategy is effectively managing fees to maximize returns. In finance, planners and advisors are compensated in two ways. They either earn flat fees or earn commissions. Working with a fee-only financial advisor generally holds more appeal than a fee-based advisor because they are paid a predetermined rate for their services without getting a commission on the products they trade or sell. They work closely with you to understand your financial situation and help lay out a plan to meet your financial goals.
So, should you be working with a fee-only financial advisor? Of course, there are many benefits, but there are drawbacks to consider, too. Let’s take a closer look.
Fee-based vs. Fee-only Financial Planners
Fee-based financial advisors are professionals who will help you devise a holistic financial plan and are not paid in the same way as a fee-only advisor. In addition to charging a fee from their clients, they also generate income through commissions on financial services or products that they recommend. Additionally, they may charge a performance-based fee that is pre-agreed.
Benefits of Fee-only Financial Advisors
As fiduciaries legally obligated to ethical bounds, fee-only financial planners always act in clients’ best interests. This means they offer unbiased advice as they are free from potential conflicts of interest. Fee-based advisors might recommend products with the primary objective of gaining commissions. At the same time, fee-only planners will only focus on suggesting services or products that align with your investment strategy.
Costs are more predictable, so there is no gray area regarding pricing. Fee-only financial planners can structure their rates in different ways: they may charge hourly or have a flat annual management fee based on a percentage of client assets.
Fee-only financial planners can help create a comprehensive financial plan to manage your portfolio and encompass other aspects of your financial situation.
Disadvantages of Fee-only Financial Advisors
Fee-only planners are directed by the fiduciary standards, but there is still room for error. In fact, there is still some bias that could exist in addition to the possibility of planners sometimes ignoring simple investment strategies even if they are applicable only because it reduces the value or need for the planner’s services.
Although their costs are transparent, they are typically on the higher end of the spectrum. Generally, they are more expensive than fee-based planners. Investors who own a smaller portfolio or have low transaction activity may benefit better from commission-based planners. However, fee-only planners are ideal for clients who have more extensive portfolios.
There are certain limitations on what fee-only planners can offer. Since they provide overall planning and investment solutions, they don’t typically recommend specific services or products or provide hands-on asset management. As a result, you may have to seek assistance elsewhere to meet specific planning requirements.
Which Financial Planner to Work With?
The type of financial advisor you pick will depend on your specific requirements, one of the most important being affordability. The cost of fee-only financial planners is easier to keep track of at the start of the process, and since they charge one flat fee, you have a better understanding of your total bill. On the other hand, fee-based planners incur fees at different stages of the planning, so tracking the costs can be challenging, particularly if you’re new to it all.
Cost factor aside, it’s imperative that you choose a financial advisor who has a financial philosophy that reflects your goals. This makes it easier to trust them, knowing that you’re both on the same page in measuring success, analyzing market risk tolerance, and many more.
How to Find a Fee-only Financial Planner?
Many organizations require members to work as a fee-only planner. This includes NAPFA, XY Planning Network, and Garrett Planning Network. You can also turn to trusted professionals like CPAa or attorneys to point you in the direction of a good financial planner and friends, family, or colleagues who may recommend one based on their own experiences. However, make sure that you check their website to confirm if they offer a fee-only structure.
Bottom Line
As your wealth grows, financial matters become more complicated, and this is why finding and hiring a financial planner is a big deal. In doing so, you’re allowing these professionals to handle your assets and wealth, and there are a lot of plans and emotions involved in this process. Therefore, it is crucial that you carefully select someone who you feel comfortable and confident enough to work with. Take time to understand how your financial planner is compensated. In addition to giving an idea regarding their fees, the compensation model can also show if the planner brings conflicts of interest in their relationship with you. In summation, fee-only financial planners have the most transparent compensation model and the most client-friendly one at that.
