Recently, I have been increasingly asked: “What is Fee-Only” planning?” and “Why should I be aligned with a Fee-Only planner?”  This article shows why more and more people are seeking out Fee-Only planners for advice.

First, we need to clearly understand exactly what a Fee-only planner is. Because of the shift in clients looking for fee-only planners, many new terms have been coined to confuse clients, so we must dissect the true meaning of these terms as well

What is “Fee-Only”?

The National Association of Personal Financial Advisors defines Fee-Only Planners as those whose compensation for advice or ongoing management services is paid directly and totally by the client.  No other financial reward is provided by any institution and no commissions are received by the sale of products or services purchased on the clients’ behalf.  Fee-Only Compensation may be based on an hourly rate, percent of assets managed, a flat fee for specific services, or a recurring retainer fee.

What is “Fee Based”?

This is the most confusing term for clients.  If an advisor is “Fee-Based” that means they have the ability to earn a fee from the client as well as receive incentive from products recommended or sold.  It seems that this is an attempt to appear to the client to be Fee-Only but in reality the planner still receives outside compensation for promoting certain products.  Advisors in a fee-based role still must deal with the potential conflict of selling products to a client not necessarily based on the client’s best interests, but because of pressure to sell specific products to meet company goals or to increase the planner’s personal income.

What is “Fee-Offset”?

Another confusing term created to disguise commission-driven firms is called “Fee-Offset”. These planners receive a fee for services and then offset that fee with the commissions they earn from selling the client services or products. In practice, this guarantees the planner a minimum fee and still allows him to earn a higher amount of income if he can exceed the fee with commissions. This is the worst of all worlds for the client.

What is “Commission Based”?

This is the “old school” method of compensation for financial services. Commissioned advisors receive their income from the sale of products. For each dollar of product sold, a percentage is paid by the company whose product is sold to the planner that markets and sells it. There may be an inherent conflict of interest in this model as firms selling financial products pay the planning firm for marketing and selling their specific offerings ahead of other products that might be more beneficial to the end client.

It is important to understand these different structures in order to fully grasp the true advantages of fee-only planners. While there are many commission or commission based planners that are good people with good intentions, their structure platform will make it difficult to always do the best things for their clients. Someone once said, “When all you have is a hammer, everything looks like a nail!” In the financial planning world, if your company sells a certain life insurance product or investment and your client needs insurance or an investment, it is more than likely that those products will be your solution to every client’s insurance and investment needs.

Fee-only planners are free to develop relationships with their clients that let them focus on the client’s true needs and goals without being fettered by limited number of offerings and the pressure of sales managers. Fee-only firms are not limited to one company’s “box of tricks,” but instead are free to choose the ideal product or service for their clients, which may even mean that in some instances, to remain in current products or be invested in cash if the situation warrants it. This option would pay no commissions at all to commission planners, and consequently might be passed over even if it were best for the client.

Fee-Only, Registered Investment Advisors are structured to work closely with their clients to find the best solution for each particular client.  Fee-only planners are free to get a full understanding of the client’s goals, potential risks, and opportunities.  While commission planners see investment advice as the crux of financial planning and are most interested in the areas of the client’s plan that generate commissions for them, Fee-Only Planners understand that investment advice is but one part of the overall financial plan. Excellent financial planning is more about uncovering opportunities the client does not know exist rather than creating retirement projections over and over again.

Team Financial Strategies has chosen to work as a Fee-Only Registered Investment Advisor because we know this puts us in the best relationship to serve our clients.  We work hard for clients in their situation without the conflicts other firms deal with.  It is our duty to deliver the best advice possible for the client.

We have two styles of management based on the needs and contract with the clients.

Wealth Management Portfolios: For our clients signed up for our “Wealth Management” service, we tailor their portfolio to their needs using investments from various asset classes including options for hedging and enhancing the portfolio. Our investment team considers Macro risks and the client’s advisors consider the individual risk reward profile of the client to build out and manage the individual portfolio.

Wealth Builder Portfolios: For our clients signed up for our “Wealth Builder” service our investment team focuses on building portfolios for long term growth while still taking into consideration the clients risk/reward profile. For this service our investment team manages models by selecting mutual funds and percentages of a portfolio to be invested in each fund for a risk reward profile. Then advisors can assign the investments to each client and the portfolio will remain invested and rebalanced based on our team’s parameters on a regular basis.

Active vs Passive: Our philosophy leans toward active management but we feel that this should not be a choice of style that an investor must pick. We believe there are definitely times and opportunities where active managers provide a lot of value to a portfolio in various areas of the market and there are also times where passively investing in an index is difficult to beat. With that said, even deciding the allocation of passive investments is an active management decision. It is also an active decision to keep some money in cash. Investing involves decision making. Our goal is to help the client make the best decision possible for their portfolio at a given time based on the information we have for them.

Our team of professionals spans many years of experience in a multitude of areas that are covered in wealth management. For our wealth management clients, we want to help you look at the areas of your financial life where we can make the most difference. Therefore, we take a comprehensive approach looking into various areas of your finances and making recommendations in areas such as tax planning, risk management, generational planning, and retirement planning strategies.

Need help keeping up with your business finances? Would you like a team to work with that can help you make informed and guided decisions? Our business planning team can help you make sure you are keeping up with the essentials while planning for the future. There are specific advantages for business owner’s finances with good decision making.

Have you been appointed as the Executor/Executrix of an estate? Our team has assisted clients with the settlement of an estate on many occasions. This area is one that can have many hurdles and pitfalls. Our experience in assisting clients can be used to your benefit. If you are the executor of an estate, we can work with you through this process to make sure it is done in a way that can save you time, money and stress. If you would like to discuss these services with our team, click here to make an appointment and put “Estate Assistance” in the “Additional background information” field.

Since opening Team Financial Strategies in April of 2005 we have developed sound investment management strategies that we manage within client portfolios and for institutional investors. For a brief description of each strategy click here. To inquire further, please contact our investment team at 325-480-1587.