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.