What is a fee-only financial advisor anyhow?
Advisor compensation and fee-only financial planning can be a confusing topic. These days, it feels like every advisor website touts the fact that they have your best interest at heart.
To further complicate things, there are advisors who call themselves fee-only, and others who classify themselves as fee-based. It’s becoming harder and harder to know who’s who, and what different fee structures mean for you - the one who’s depending on their advice to lead a successful financial future.
What Does Fee-Only Mean?
Fee-only financial planners are only compensated by the fees their clients pay.
Other advisors who aren’t fee-only could be compensated by:
Commission from investment sales
Commission from insurance product sales
Commission just to recommend a specific investment (annuity, fund, etc.), or insurance product
Commission from stock trades
Fee-only advisors are generally compensated by :
Percentage of assets under management (AUM)
Flat-fee (typically a monthly retainer, or up-front cost for a financial plan)
That’s a long way of saying that fee-based or commissioned advisors can get paid by companies to sell you a product where fee-only advisors are only paid by you to provide you advice.
These investment and insurance decisions are often what you’re basing your entire financial future on, and there’s no guarantee that advisors who receive a commission are always acting as a fiduciary when they recommend that you purchase a particular financial product. That’s a nerve-wracking thought.
At Covenant Wealth Advisors, we have a fee-only financial planning and investment management practice. We don’t receive commissions from selling financial products or making specific recommendations. We believe this is in our client’s best interest, which is one reason we founded Covenant Wealth Advisors in the first place.
What Other Fee Structures Are There?
There are three different fee structures that advisors typically stick to:
This is where things can get a little bit confusing if you’re interviewing a variety of financial advisors.
Fee-only and fee-based advisors aren’t paid in the same way. Fee-only advisors are only compensated by the fees their clients pay them.
Fee-based advisors are paid by the fees their clients pay them, but can also receive some commissions.
Commission advisors are paid a commission only based on the sales they make.
Understanding Conflicts of Interest
All of this isn’t to say that fee-based or commission advisors are sharks who are out to steal your money and sell you financial products you don’t need.
However, to understand why fee-based advisors may not always be acting as a fiduciary (even if they’re fantastic people with good intentions), we need to take a second to go over conflicts of interest in the financial planning profession.
It’s obvious that a fee-based or commission financial planner has a few conflicts of interest that are important for you to fully understand. If they’re making financial recommendations but are getting paid more for selling one product over another, they are financially incentivized to recommend a product that will earn them more money – which may not necessarily be the same product that will be best for your particular financial situation.
Even if they have good intentions as a fee-based advisor, when push comes to shove, they still have a vested interest in using the investments and financial products that they get paid to recommend.
In our opinion, that’s too big a risk to take!
The Fiduciary Standard
As fee-only advisors, we always abide by the fiduciary standard. This means that we’re legally obligated to act in your best interest at all times. The fiduciary standard is borne out of the Investment Advisers Act of 1940, which is promulgated by the SEC.
The rule very specifically states that advisors who abide by the fiduciary standard must always put their client’s best interest ahead of their own, in every situation.
When you’re interviewing advisors, you want to ensure that they’re adhering to the fiduciary standard, and that means finding an advisor who reduces conflicts of interest, discloses conflicts of interest if and when they arise, and who is paid only by you.
Why Does It Matter?
At Covenant Wealth Advisors, we want to always put your best interests first. That’s why we’re fee-only and abide by the fiduciary standard. We want our clients to know that any recommendations we make are rooted in a desire to help them live their best financial future.
We also encourage you to seek out other fee-only advisors if you’re currently interviewing to find someone who’s an ideal fit for you.
Certain organizations, like NAPFA and Fee Only Network, require that advisors who participate in membership are fee-only. Searching for advisors through these networks can help you to find a fee-only advisor who can be the right fit for your financial needs.
Have questions? Reach out! We’d love to walk you through our fee structure, and what it means to be a fee-only financial planning practice.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.