Have you heard the term before? Perhaps you have and that is what brought you to this article. But perhaps it is a new term you came across in searching for your first financial advisor.
It is a phrase being used more frequently in the financial services industry as more advisors are making a transition to operate under the fee-only model. In my opinion this is great!
But to be an informed consumer you should understand the options available to you in order to determine what is most appropriate. There is no one size fits all solution and even among fee-only advisors there are several different service models.
What Exactly is a Fee-Only Advisor?
A fee-only financial advisor is compensated only by fees that the client directly pays to the advisor.
This may seem intuitive. You hire someone to do a job and they get paid by you. But this is not always the case. Alternative service models include:
- Commission Based – All compensation to the advisor comes from commissions on products they sell. This can appear to cost you nothing, but don’t kid yourself, there are certainly fees behind the scenes.
- Fee-Based – Different from fee-only! In a fee-based relationship, the client pays some sort of fee to the advisor, but the advisor is still allowed to earn commissions through the use of specific products.
With a fee-only advisor you also know that you are working with a true FIDUCIARY who must operate in your best interest.
Again, you would naturally think that your advisor is always operating in your best interest, but under other types of arrangements an advisor may only be required to offer recommendations that are SUITABLE.
Let me fill you in on a little secrete…there is a BIG difference between what is in your best interest and what is suitable.
This is not to say that anyone who operates under a different structure cannot be trusted, but you should know the ins and outs of the relationship you are entering.
What Are the Common Fee Structures of a Fee-Only Advisor?
The term fee-only applies to several different types of fee structures. What is important to remember is that under any of these structures, the only compensation being received by the advisor is the fee being paid directly by the client. Fee-only models include the following fee structures.
- Asset Under Management (AUM)
- Fee: Based on a percentage of AUM, with the median fee being around 1%. Fees are deducted directly from a clients account rather than paid out of cash flow.
- Services: An ongoing relationship with investment management and possibly financial planning depending on the advisor’s service offerings.
- Notes: Two advisors with the same percentage fee may have vastly different services. Do your research and determine the services provided and the value you will receive.
- Fee: A set fee paid monthly or quarterly.
- Services: An ongoing relationship with financial planning and typically investment management. Investment management may be limited to a certain level of assets.
- Notes: A retainer fee removes the asset minimum barrier that some firms have under the AUM model.
- Fee: An hourly rate paid only for the amount of time needed.
- Services: Not an ongoing relationship. The advisor will provide assistance on the topics that you request.
- Notes: The implementation of recommendations remains with the client. This type of arrangement is more reactive in nature rather than proactive.
- Project Based
- Fee: A flat fee determined at the beginning of the project. 50% of the fee is often paid at the start of the engagement with the remaining 50% upon completion.
- Services: Not an ongoing relationship. The advisor will create a comprehensive plan, or a plan based on the limited scope needs of the client.
- Notes: The implementation of recommendations remains with the client.
Each one of these structures is appropriate for different situations and you should understand the type of engagement you are looking for prior to hiring an advisor. Not all fee-only advisors operate under each structure. For example, Crest Wealth Advisors operates under an AUM or a retainer structure depending on the clients needs and situation.
Benefits of Working with a Fee-Only Advisor
Let me start by saying that no model is perfect. And no model is inherently wrong. What is important is that you go into the working relationship with a complete and transparent understanding of how the advisor’s compensation is earned.
The goal of a fee-only relationship is to limit conflicts of interest that are inherent in other models. Notice that I did not say “eliminate” the conflicts of interest. That is almost impossible within any model.
By removing a product-based commission, the client-advisor relationship becomes more about what is best for the client in achieving their goals. A fee-only advisor is not looking for ways to earn commissions, but rather is looking for solutions to the clients’ problems.
Are there any conflicts that exist in a fee-only relationship? Yes.
One of the most commonly talked about conflicts is that an advisor operating under an AUM model has an incentive to keep assets under the firm’s management rather than provide recommendations that may result in some of a client’s assets being used elsewhere, such as paying down a mortgage.
It is true that a firm operating under an AUM model has more incentive to keep assets “in-house”. And this is where trust becomes so important. If you trust the person you are working with then you should feel confident knowing that if a situation such as this arises, that your advisor will operate in your best interest by informing you of all relevant information and determining the best path forward for you.
Where Can I Find a Fee-Only Advisor?
You should first understand that anyone can call themselves an “advisor”. There is no requirement to use that title.
However, there are requirements for an advisor to call themselves “fee-only”, which results in reliable databases for where you can find a fee-only advisor in your area.
Some of the most reputable sources include:
- NAPFA – National Association of Personal Financial Advisors
- CFP Board
- Fee-Only Network
- XY Planning Network
- Garrett Planning Network
As a fee-only firm in Annapolis, Maryland I may have a personal bias toward the fee-only model. But again, the correct model for you will depend on your specific needs. The next time you interview an advisor who you may work with ask them the tough questions. Make sure they are transparent in their answers and that you fully understand how the relationship will operate.
If you are interested in learning more about Crest Wealth Advisors services, then Schedule A Call!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.