What is a fee-only advisor?
If you’re on zoefin.com you’ve probably realized that you need the expertise of a financial professional to manage your investments or help build a plan to make better sense of your financial life.
However, not all financial advisors are the same. Some only manage investments, some offer financial planning services to address everything from reducing debt to saving more effectively for retirement and college, and some just trade stocks or sell investment products and insurance. To make it even more confusing, many are licensed to do all of the above.
Then there’s the issue of compensation. How financial advisors are licensed and regulated determines how they earn a living. Some are fee-only, meaning they’re paid directly by you, whereas others earn commissions from the products they sell.
So does their registration or compensation method determine whether they’re obligated to work in your best interests, rather than their own? You bet it does. That’s why it’s critical to understand the difference between financial advisors who are fee-only and those who are not.
Fee-only financial advisors: grounded in the fiduciary relationship
Fee-only financial advisors include investment advisors and financial planners (many of whom are both) paid only by you, the client.
Investment advisors are licensed or regulated by their state and/or the Securities and Exchange Commission (SEC). These regulations require them to act as fiduciaries: their advice and services must always align with your best interests. In practical terms, this means:
- Advisors must only recommend investments that reflect your specific financial and investment objectives, timeframes, and risk tolerance.
- They must manage your investments with a high degree of care and caution.
- They must try to keep costs reasonable.
- They must fully disclose any potential conflicts of interest that could affect their ability to carry out their fiduciary responsibilities.
Financial planners are individuals who create financial plans intended to define or address issues such as cash flows, debt management, investing, insurance, and estate & succession planning. There are no formal licenses or regulations governing financial planners, but those who want to manage investments are usually licensed as investment advisors.
Some financial planners work in a fee-only capacity and embrace the fiduciary standard, while others might call themselves a financial planner but are actually salespeople in disguise.
Your typical advisor fees may vary
In exchange for this fiduciary commitment, fee-only financial advisors are paid directly by you. These fees may take several forms.
Some are paid a percentage of the assets they manage for you, others charge an hourly fee or annual retainer i.e. a flat annual fee, and some develop stand-alone financial plans at a fixed cost.
Since these fees are coming out of your pocket, it’s a good idea to understand the pros and cons of advisor compensation models.
Which advisors aren’t fee-only?
Registered representatives, commonly known as brokers, are licensed and regulated by the Financial Industry Regulatory Authority (FINRA). Working for broker-dealers, they make their living on the commissions they earn from selling investment and insurance products.
Brokers are not required to act as fiduciaries. Although the products they recommend must meet the suitability standard, they are not strictly prohibited from choosing higher commission earning products and are therefore legally able to push their own products or those that offer them the largest gains.
Should you always choose a fee-only financial advisor?
To be honest, we don’t like the word always.
Let’s say that the value of your investable assets is less than $100,000 or you make under $80,000 in household income per year. In this case, many investment advisors will not find it economically viable to manage your assets, or deem it fair to charge you $2,000 per year for their services. In these cases, hiring a broker that gets paid through the products he or she recommends is an option. However, you need to ensure that you understand how they get paid and why they recommend what they do. It is important to understand the differences between the different types of advisors.
One more area of potential confusion: fee-based compensation
Many financial advisors describe their compensation as fee-based. This means that they can act in a fee-only capacity for some clients and as a broker for others. An important point here is that fee-based advisors cannot receive fees and commissions on assets they manage for the same client.
The concern in these cases, however, is that the advisor that has a hybrid role could still be able to put on a suitable hat versus a fiduciary hat, depending on the situation that generates the most revenue for him or her.
How to research a financial advisor’s credentials
Beyond using this site to find a fee-only financial advisor, you can also research any financial advisor at Investor.gov. Run by the SEC, this site offers a searchable database of all licensed financial advisors. Simply enter an advisor’s name and location in order to view a detailed report. This will tell you if the financial advisor is a licensed investment advisor, registered representative (or both), their employment history, their educational background, and any instances in which they’ve violated industry regulations.
You should also visit the advisor’s website to learn more about their background, the firm’s service model, and their fee structure. If you decide to meet with a financial advisor, make sure you’re armed with interview questions that can fill in any information gaps.
The next step
If you’re looking for objective guidance that is unencumbered by personal profit motives, working with a fee-only financial advisor is the best choice. This will give you peace of mind knowing that your best interests will always come first.
And when you’re ready, let Zoe Financial help you find the right one.