Term of the week: Fee-Only Financial Planning
The most frustrating thing about being a financial planner is speaking with a person who has no idea what they are paying their advisor, or if their financial planner has a sliding scale (I.e. AUM). It's not their fault, of course, it is a result of the lack of transparency within my industry. A person will think they are paying their advisor $100 a year when in reality they could be paying five times that much.
There are three different ways that an advisor can be paid.
- - Commission only
- - Fee-based
- - Fee-only
Fee-only financial planning is the compensation model of financial advisors where you pay directly for the services rendered. This could be through an AUM fee (where you pay as a percentage of your investments) or through a retainer model (like a subscription service).
Why is this a big deal? The other two compensation models give incentives for specific investments or products that a financial advisor sells to you.
For example, Your advisor is about to make an investment recommendation. On the one hand, a mutual fund will pay them 1% to recommend their product and another mutual fund will pay them 3% to recommend their product. Other than the commission, the mutual funds are comparable. The advisor will be tempted to select the latter. Want to know who pays that commission? You do! It won't be direct but there will be a line item in your quarterly fees where your advisor will be paid a commission. The scary thing is that even these fees have a confusing name that says nothing about what they are actually for and your advisor may something along the lines of "you don't pay me, my company does." This is a technicality because if they weren't being paid from the sale of a product, then your end cost would be less. And this "end cost" could be devastating to your retirement nest egg.
With fee-only financial planning, the financial planner doesn't even get the chance to make that choice. There are no products to sell in the first place! Fee-only financial planners must put their clients' best interest before their own and the lack of commissioned incentives make that decision a little more black and white. This is the underlying nature of being a fiduciary (which you should ask your advisor/planner if they are a fiduciary).
What have your experiences been with fee-only financial planners? If you want to learn more about our process, click HERE.