If you are a long-time Clark Howard listener or you’re familiar with NAPFA, you likely understand the advantages of working with a fee-only financial advisor. However, if you’re early in your search for an advisor or aren’t really sure how advisors are compensated and why that matters, we think you’ll find the information below helpful.
1) What is a Fee-Only Financial Planner – A fee-only financial planner sells no commissionable products and accepts no referral fees. This is an across-the-board policy with no exceptions. As an example, a true fee-only financial advisor would not provide planning and investment advice on a fee-only basis, but sell commissionable insurance products. You may find an advisor who refers to herself as a fee-based financial advisor, and usually what this means is that the advisor offers some services for a fee, but receives commissions for other services or products.
2) How much does a fee-only financial advisor charge? The fee charged depends on the advisor and the service you want. Traditionally, advisors worked with clients on an ongoing basis under a retainer agreement, and they charged for their services based on the size of the client portfolio. This model, typically known as AUM or assets under management, is still common today. Fortunately for those seeking advice, there are now a number of other ways fee-only advisors charge clients, from hourly rates to subscription fees to flat fees for ongoing arrangements. These changes have made advice available to a wider range of clients – not just the wealthy.
If you’re interested in how much an advisor charges, you can often find that information on their website. If fees aren’t shown on the website, check out the ADV Disclosure brochure the advisor is required to file with the SEC.
3) Is there a difference between a financial advisor and a financial planner? In some instances, an advisor may assist with both planning and investment management, while a financial planner focuses solely on planning. Often though – as is the case with our firm – the terms advisor and planner are used interchangeably and they offer the same services. Either the website or the ADV should provide specifics on what services are offered.
4) I often hear the word fiduciary associated with fee-only. Why is that? A fiduciary is someone who holds a position of trust with one or more parties, and from a legal perspective, being considered a fiduciary essentially means you have a heightened responsibility to your client. For a financial advisor who does accept fiduciary responsibility accepting income from a third party related to sale of a product to the client can be dicey. It can be particularly dicey if the product in question pays higher commissions than other similar products.
Given that fee-only advisors accept no commissions or referral fees, this potential source of conflict is removed and accepting fiduciary responsibility is much easier to do. And while those advisors who don’t accept fiduciary responsibility can still provide good, helpful advice, if you’re choosing among similar advisors, the advisor who pledges to act in your best interest at all times will likely have a leg up.
5) How do I find a fee-only financial advisor near me? We’ve written a comprehensive post on how to find a financial advisor. If you’re looking for a fee-only advisor, two good sources to start with are The National Association of Personal Financial Advisors (NAPFA) and the CFP Board. NAPFA is a member organization solely for fee-only financial planners, so all advisors under the NAPFA umbrella meet the strict definition of fee-only. While the Certified Financial Planners listed include both fee-only and non fee-only advisors, you can specify you want a fee-only advisor under advanced search options.
6) Do I have to work with a fee-only financial planner to get good advice? No, you can get good advice from advisors regardless of whether they are fee-only or commission based. The issue is that commissions increase the risk of conflicts of interest and potentially decrease the set of tools an advisor can use to serve your needs. If, for example, an advisor works for an insurance company and earns commissions, he will likely turn first to insurance products as a solution. Because a fee-only financial advisor doesn’t depend upon product sales to generate income, there is no risk that what they might earn from product sales will intentionally or unintentionally color their advice.