Why Hiring a Fee-Only Financial Planner Is a Wise Investment
Managing your finances can be a daunting task, especially when it comes to making important decisions related to investments, retirement planning, and tax strategies. This is where a fee-only financial advisor can be a valuable resource. In this blog post, we will discuss the benefits of hiring a fee-only financial planner and why it is a wise investment for your financial future.
What is a Fee-Only Financial Planner?
Are you wondering what a fee-only financial advisor is? Who do they work with and how can they help me? Unlike financial advisors who earn commissions on the financial products they recommend, fee-only advisors are compensated solely by the fees they charge their clients. This means that recommendations from fee-only advisors are not influenced by any potential commissions or kickbacks, ensuring that their advice is solely focused on what is best for you. This transparency and objectivity, as well as cost-savings, is one of the major advantages of working with a fee-only financial advisor. It fosters trust and confidence that your advisor is working in your best interest.
Fee-Only vs. Fee-Based Financial Advisor
Don't be fooled by how similar these descriptions are. There is a big difference between fee-only and fee-based advisors. A fee-based financial advisor is a financial professional who charges clients ... They earn commissions or fees through the sale of financial products, such as investments or insurance. It is a dual compensation structure. They also charge clients a fee for portfolio management or financial planning, while also having the potential to earn additional income through financial product sales.
This combination of fees and commissions can create conflicts of interest, as the advisor may be incentivized to recommend financial products that generate commissions, even if they are not the best fit for the client’s needs.
Here are a few examples of how a fee-based advisor may receive compensation from commissions, in addition to collecting a management fee:
- Insurance: A fee-based advisor may act as an insurance agent, who sells insurance policies or products. He or she may earn commission from the insurance company.
- Brokerage fees: Some fee-based advisors operate as a broker-dealer, which means they can earn fees when making trading transactions. Often they also sell investments to clients that the brokerage firm owns.
- Mutual funds: When choosing a mutual fund to invest your money in, fee-based advisors may receive a commission from the fund.
You should carefully consider how the compensation of fee-based advisors may impact the advice and recommendations they give.
Benefits of Hiring a Fee-Only Financial Planner
A key benefit of hiring a fee-only financial advisor is the assurance of conflict-free advice. Advisors who work on a commission basis may have an incentive to recommend certain investment products that pay them higher commissions, even if those products may not be the best fit for your financial goals.
According to Investopedia, “An advisor who only earns commissions—like a stockbroker—is held to a lower standard and does not have to make a "best-interest" recommendation, but rather one that is "suitable" for your needs.”
On the other hand, fee-only advisors have no such conflicts of interest. They are motivated to provide you with unbiased advice that aligns with your specific needs and objectives. Registered Investment Advisors (RIAs) and certified financial planners (CFP®s) are examples of both fee-only, fiduciary financial advisors. As fee-only financial advisors, recommendations are tailored to your unique circumstances, rather than being influenced by potential financial gains for the advisor.
Fee-Only Financial Planner Fees Aren't Always Reasonable and Affordable
Be cautious and avoid assuming that a fee-only financial advisor automatically offers reasonable fees just because they follow a fee-only model. While it's likely that a fee-only advisor is more cost-effective compared to a fee-based advisor, don't fall into the trap of assuming that all fee-only advisors provide fair pricing. Fees that amount to 1% or more of your managed assets each year can compound into substantial sums over time. It's essential to be aware of the long-term cost associated with an AUM fee of 1% or more, which you can calculate using this calculator.
It's prudent to thoroughly evaluate the pricing structures of both fee-only and fee-based advisors.
A Wise Investment: Hiring a Fee-Only Financial Planner
Hiring a fee-only financial planner can be a wise investment for your financial future. The transparency, objectivity, and conflict-free advice they provide can help you make informed decisions and avoid potential costly mistakes. At Sensible, our process of giving financial advice involves collaborating with clients throughout their retirement journey. We are fee-only financial advisors that are required by law to always act in the best interests of our clients. To learn more about our fiduciary commitment, click here to start a conversation.
This blog article is for informational and educational purposes only.
Sources:
Investopedia
Source to Calculate Long-term Cost of Advisor Fees
