Why a Fee-Only Financial Planner?
Personal financial planners are plentiful. It looks like they all provide the same essential services, so how do you choose one? One consideration is how they get paid. This can have a surprising impact on the quality of the financial advice you receive - and whether it's in your financial best interests.
Read on to discover how to find the right financial advisor.
How do I Choose a Financial Advisor?
So you're looking to find a financial advisor. But do you know their fees can affect the advice they give? There are three common compensation structures advisors use. The first is commission. This means they make profits on the financial products they sell, like investments or insurances.
The second is fee plus commission, or fee-based. This means the advisor still charges clients for advice and makes commissions selling products.
The third and best option (in our opinion) is Fee-Only. A Fee-Only advisor does not make any money from commissions. Instead, they get compensated on a set fee basis, or by Assets Under Management (“AUM”), which is a structure based on the percentage of assets.
Phoenix Fee Only is your number one resource to find a Fee-Only Certified Financial PlannerTM professional in the Phoenix area. You can rest assured services are unbiased because Fee-Only financial advisors are legally obligated to put their clients first. You can be confident that Fee-Only advisors aren't compensated by what investments they sell.
The Fee-Only model means the advisor doesn't receive commissions, incentives, or added management costs to steer you in one direction or another.
Most financial planners are commission or fee-based. This means they get paid on an entirely different basis - and you might be surprised how profitable it can be for them not to give good advice!
Few people understand the different ways to pay for financial planning services. But it's important to know the difference between Fee-Only, commission-only, and fee-based financial planners.
SO LET'S BREAK IT DOWN:
How do Financial Advisors Get Paid?
Financial advisors are compensated in three main ways:
1. Commission-based Financial Planner
2. Fee-only Financial Planner
3. Fee-based Financial Planner
- Commission-based Financial Planner
"Commission-based financial advisor" is a fancy way of saying "salesman." They get compensated when they make a sale. The advisor's compensation varies depending on what's being sold or how much money you're putting in it. Some examples include annuities, life insurance, and mutual funds.
This group of financial advisors include stockbrokers who convince you to buy investment or insurance products for the sole purpose of making a profit from you. These products may be suitable for you, but they might not be the best product available. These advisors can have conflicts of interest that compromise their advice.
You could be tricked into thinking that these advisors care about what's best for the client; however, it's only incidental to the transaction. Their goal is making a profit from this interaction.
Once a sale is complete, it doesn't matter how bad or good an investment idea was because - thanks to something called the "suitability" standard - agents have little responsibility if anything goes wrong. As long there was some consultation with the client, the so-called advisor is in the clear. The advisor gets his cut of the profits - and goes on to the next one!
Commissioned advisors are not required to disclose commissions or any conflict of interest. That leaves them free to sell products they profit from, without regard for the client's financial investments. They're selling something to make money first (rather than helping). But as consumers get wise to the tricks of financial planning, there will hopefully be fewer salesmen using this model.
It's still by far the most common model out there right now - so buyer beware!
- Fee-Only Financial Planner
Now for the good news. Fee-Only financial planners are held to the highest ethical standard. They are the only type of financial advisor to always put client’s interest first in a fiduciary services and investment management model.
Wait, what is a fiduciary?
A fiduciary is a financial advisor who is legally obligated to do what’s in the best interest of their client. They must maintain confidentiality and produce comprehensive, unbiased advice for their clients to make informed decisions.
A Fee-Only advisor focuses on the comprehensive nature of your situation and your investments. They work with clients to develop a comprehensive financial strategy that addresses investment options, risk tolerance, and time horizon. A Fee-Only plan is a straightforward and objective guide in managing your finances.
According to the National Association of Personal Financial Advisors (NAPFA), "the Fee-Only method of compensation is the most transparent and objective method available."
Fee-Only planners make decisions for a client's benefit instead of trying to make them purchase financial products and services they might not need (or be able to afford). Every Fee-Only planner follows strict fiduciary standards and ethical obligations so that the best interests of others always come before their own. The goal is to provide financial advice that is always to your benefit.
Fee-only financial planners never earn commission on investment products.
If you want to avoid the risk of getting an adviser who is potentially biased by commissions, then a Fee-Only financial planner is for you. At Phoenix Fee-Only, our members are part of organizations such as The National Association of Personal Financial Advisors (NAPFA), and have been involved with advancing the cause of these organizations.
- Fee-based Financial Planner
Fee-based financial advisors are in-between commissioned and Fee-Only financial planners. They charge for managing assets and, on top of this, receive compensation through the commission on the services they sell (whether you need it or not).
This creates ethical conflicts because - similar to commissioned advisors - they are not required to reveal the amount of money they make from commissions. They may cost you more in the long run.
FEE-ONLY FINANCIAL PLANNER VS. FEE-BASED:
What's the Difference?
Now, we're not saying that there aren't honest fee-based advisors out there. But even the best might face pressure to recommend products that generate more income, and selling you insurance policies and variable annuities that might not necessarily work in your favor.
It's wise to consider compensation models before choosing a financial planner.
How do you know which financial advisor to trust?
Each certified financial planner at Phoenix Fee Only is approved by the high standards of The National Association of Personal Financial Advisors (NAPFA) for strict fee-only compensation and ethics. We're not just good at what we do; what we do is good.
6 Reasons Why You Should Hire a Fee-Only Financial Planner
- Fee-Only advisors do not earn commissions or other incentives, which allows them to focus on the client's needs because they have the least amount of conflicts of interest.
- Costs can be based on time spent with the client and their needs. You know exactly what you're getting for your money. Sometimes you only pay flat fees for a service.
- More personal attention as there is no incentive to push products that may not be right for your situation.
- Service in all areas of personal finance, including taxes and retirement planning.
- No hidden fees (did we mention it's often a flat fee?) There's no ongoing sales pitch or hidden cost structure. Straightforward pricing means you know exactly what you're paying for from beginning to end!
- Fee-only financial planners offer ongoing advice and financial planning; they are available as your life changes over time, unlike commission-based advisors who only sell clients a product.
How do I find a fee-only financial advisor?
At Phoenix Fee Only, we have a Certified Financial PlannerTM professional for every situation. We can help you find a suitable solution to your financial needs, including:
Employee Equity & IPOs
College Education Planning
Credit, Debt, & Student Loans
Retirement Income Planning
The National Association of Personal Financial Advisors (NAPFA) also offers an excellent resource to help find and compare fee-only planners.