Advisors and planners in the financial industry are paid in one of two ways: either they receive flat fees or commissions. Instead of receiving a commission on the items they sell or trade, fee-only financial advisors are compensated at a predetermined rate for the services they render.
Should you deal with a financial advisor who charges fees only? A person who receives all of their compensation from the fees they charge their clients directly rather than through commissions made from the sale of financial goods or financial transactions enjoys various advantages. There are negative aspects as well, though. Let’s recap.
Commission- or Fee-Based?
The fundamental pay scales for financial advisors are as follows:
They bill a set or hourly rate for the planning services they offer. Depending on the engagement, they could offer a small amount of advise or a lot of it. There are both one-time and ongoing engagements.
charging a proportion of the value of the investment account (let’s say 1%) depending on assets under management (AUM). Planning and/or other advice, which are typically secondary to money management, may or may not be included in the engagement.
receiving commissions based on a financial transaction, such as a stock trade, or the sale of a product. A stockbroker’s advice or planning may be incidental to the sale of the product, or they may be a crucial component of services (as with a financial planner).
receiving compensation in the form of commissions, flat fees, and/or a percentage of AUM. The counselor determines the precise blend. This strategy, also referred to as “fee-based,” enables advisors to provide clients with a larger choice of services, work with them to execute suggestions, and track success.
There has been some discussion regarding the proper definition of “fee-only” compensation, namely whether or not the second category—those that charge based on AUM—should be included. Most people agree that the term “fee-only” often refers to payment from fixed, flat, hourly, or percentage-based fees.
Benefits of Working with a Fee-Only Advisor
The absence of the inherent conflict of interest that can develop when an advisor earns a sizable amount of their income from you by selling financial products is one of the main advantages of choosing a fee-only advisor. If you’re a potential customer, you should wonder whether the advisor is advocating a particular investment because it helps their business, and whether the items they’re recommending are actually in your best interests.
Indeed, certain registered representatives and others who receive all or a portion of their pay through commission may be obligated to prefer the goods provided by their employer, which may or may not be the ideal investments for your portfolio plan.
The likelihood of conflicts of interest is minimal for fee-only advisors because they do not market commission-based products, earn referral fees, or receive any other types of payment. Many advise that you exclusively work with a fee-compensated advisor because of this.
Additionally, when an adviser receives payment for planning services or invests money for an advisory account, they are typically considered to be fiduciaries and are therefore legally obligated to behave in their clients’ best interests at all times and to report anything that would seem improper. For instance, both registered investment advisors (RIAs) and certified financial planners (CFP®s) make a fiduciary oath.
Use of a Fee-Only Advisor Drawbacks
Although the aforementioned benefits are all excellent justifications for hiring fee-only consultants, there are still some potential drawbacks.
The cost of fee-only advisors may be higher, at start. Let’s take the scenario where a fee-only adviser identifies a need throughout the planning process and advises a client to purchase a commission-based product, such as disability income insurance. The client would need to find and work with an insurance broker if the fee-only advisor doesn’t sell the policy, which would add more steps to an already complicated process.
The client pays both a charge and a commission because the insurance broker also makes money from the product’s sale (albeit to different people).
What Is the Price of a Fee-Only Financial Advisor?
The fees charged by a fee-only financial advisor might differ significantly based on their level of experience, their location, and the services they provide. For the initial development of a thorough financial plan, a flat cost of $1,500 to $3,000 is normal. Rates for timed or retainer work can range from $150 to $400 per hour and from $1,000 to $7,500 per year. A sliding scale of fees, often between 1 percent and 2 percent annually, are assessed by those who take a percentage of the assets they manage.