The Fee-Only Concept
Beware The Commissioned Advisor...
When seeking professional advice it is natural to want that advice to be guided solely by your best interest. Nonetheless, many financial planners and investment advisors operate within a structure that provides incentives that may impair, or at the very least, test their objectivity.
When selecting an advisor, it is crucial to understand how he will be compensated. In general, an advisor may earn income in one of two ways – by charging fees for his efforts or by selling products that generate commissions. An advisor may do both, but the great majority of advisors rely on commissions to at least some extent.
Why? Because many financial advisors are really salespeople who work for sales organizations that have a vested interest in getting you to buy whatever it is they happen to sell.
"I do perceive here a divided duty.” – William Shakespeare
Many professions require their practitioners to be advocates for the interests of their clients. In contrast, commissioned financial advisors often represent a particular brokerage firm or insurance company.
They do not represent you. They are not your advocate.
"Financial Planners who take commissions have a built-in conflict of interest...even with disclosure, my choice would be a Fee-Only planner." – Jane Bryant Quinn, NEWSWEEK
By removing commissions and other hidden incentives from the compensation equation, your advisor’s interests will become more closely aligned with yours. Learn to recognize when a financial advisor is really a commissioned salesperson.
Enter the Fee-Only Advisor...
There is an alternative to the commissioned salesperson - the fee-only financial advisor. Not to be confused with fee-based financial advisors who charge fees and earn commissions, the fee-only advisor’s sole source of income is from fees paid directly by the client. Accordingly, his only incentive is to provide you with advice that is worthy of that fee.
“Start with …a financial planner [whose] compensation should be from fees alone.” – Money Magazine
Fee-Only is Better – Here's Why…
Fee-Only advisors are more likely to:
Commissioned advisors are more likely to:
"84% of the advisors on our list [of America's top 250 financial advisors] are fee-only planners." – Worth Magazine
In comparison with the number of financial advisors who derive all or part of their income from commissions, fee-only financial advisors are relatively scarce so it may take some effort to locate one.
The ratio of commission-based to fee-only planners is more than 20 to 1, say experts in the field.– Marshall Loeb, CBSMarketWatch.com
Beware the Fee-Only Faker...
Unfortunately, an advisor’s promise that his practice is fee-only is no longer adequate…
“…many financial planners are reacting to growing consumer wariness about conflicts of interest by obscuring the commission-based source of much of their income.” – Barbara Roper, Consumer Federation of America
… and the problem is widespread...
“Three-fifths of financial planners who claim to offer Fee-Only financial planning services actually earn commissions or other financial rewards for implementing their recommendations for clients.” – Mystery Shopper survey released by the Consumer Federation of America and the National Association of Personal Financial Advisors
The solution? Get it in writing.
Upon dealing with an advisor who actually works on a fee-only basis, you will find that his advice will revolve around you, not the products or services of a particular company or group of companies.
And because fee-only financial advisors are not beholden to any particular products or companies, they have more latitude to search out solutions that are most beneficial to you.
“Seek an advisor who can offer you a wide range of choices. A fee-only planner does not represent any company.” – AARP
How much will you be paying your advisor? With a fee-only advisor, you’ll know.
“[another] key advantage to going the fee-only route…, you get a better idea up front how much you'll be paying for advice.” – Money Magazine