The way in which a financial planner is compensated can influence the recommendations they make for you. Some advisors work under a mandate that requires only that their recommendations be suitable for your particular situation. Other advisors work under a fiduciary standard that requires advisors to consider what is in their client’s best interest. If a financial planner or financial advisor is fee-only, that means they receive compensation solely from the fees clients pay from their services. In other words, they do not earn commissions or kickbacks for recommending certain products. Fee-Only compensation and operation under a Fiduciary standard ensures an advisory is only being compensated by you, therefore only has your best interests in mind
Fee-only financial planners charge their clients in a few different ways. The most common method is called “assets under management,” where your planner takes a percentage of the assets they manage. In this way, you would see a specific percentage-based amount debited out of your account every quarter.
Some of the most common compensation categories are:
- Advisors who only charge an hourly or a flat fee for the planning services they provide. Depending on the engagement, they may provide limited or comprehensive advice. Engagements may be one-time or ongoing.
- Advisors who charge based on assets under management (AUM), for example, 1% of the investment account value. The engagement may or may not include planning and/or other advice, which is usually secondary to money management.
- Advisors who only receive commissions based on the sale of a product or a financial transaction, such as a stock trade. Advice or planning might be ancillary to the product sale (as with a stockbroker), or they might be a key part of services (as with a financial planner).
- Advisors who are compensated through a combination of fees, assets under management, and/or commissions. The exact mix varies by the advisor. Also known as “fee-based,” this model allows advisors to offer clients a wider range of services as well as work with them to implement recommendations and monitor progress.
Whatever payment model your advisor uses, make sure they’re a fiduciary – that means they must act in your best interests. A nonfiduciary only has to help you in a way that’s considered “suitable” for your needs.
Practical Example
Think of it this way, You wouldn’t expect to go to a Ford dealership and the salesman to say, “Now that I’ve gotten to know you, I think a Jeep might be a better fit for you”
A fiduciary would be required to tell you about the Honda. A nonfiduciary? Not so much.
For more information, visit these websites:
https://www.napfa.org/financial-planning/what-is-fee-only-advising
https://www.nerdwallet.com/blog/investing/3-reasons-to-hire-a-fee-only-financial-planner/
