Is Fee Only Right For You?
by Jim Wyrostek, CFP®, CLU, ChFC, AEP
Because there have been a lot of questions in recent years and with over 40 years in the financial service industry, I would like to help you understand the difference between financial planners /advisors and how they are compensated.
I will not address qualifications but you should consider whether they have advance designations; such as CFP® , ChFC, or a Masters degree in Financial Planning.
The way in which your financial planner or advisor is compensated can make all the difference in the recommendations they make for you. That’s because some advisors work under a standard that requires only that their recommendations be suitable to your particular situation. Other advisors work under a fiduciary standard that requires advisors to consider what is in their client’s best interest. You may be wondering why your advisor would make a recommendation that is not in your best interest. That’s where the issue of compensation comes into play.
There are three basic ways in which financial advisors are compensated:
Both commissioned and commission & fee advisors receive a compensation based on the specific financial products or service they sell to you. The product must be suitable for you. However, even if the product or service is suitable, because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting the client’s interest above their own. Some may charge a fee for a financial plan and earn commissions for products they implement from the plan. This should be disclosed to you.
Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients' best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.
If they do have conflict of interest, they must disclose it.
What is nice about a FEE ONLY advisor is they can work on a specific issue only and charge a lower fee for that service.
However, one place I disagree with some Fee Only planners is in the area of Wrap Accounts. The fee they charge for assets under management (AUM), in my opinion, is a hybrid commission. I consider the Wrap Account a product that could influence a decision.
A pure Fee Only advisor should sell no products and only offer advice. However, they can assist in the implementation of a product but should receive no compensation for the sale of the product.