September 23, 2016
Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.
Commission-based agents and brokers often take offense at this distinction. Blurring the difference, they created the category dubbed “fee based,” which means they charge a fee in addition to collecting commissions. Study after study show that even consumers seeking a strictly fee-only advisor find these terms confusing.
“The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business.” Fee-only advisors help reduce the conflicts of interest inherent in how they get paid and what they recommend.
Most commission-based agents and brokers are no doubt sincere people trying to do honest work for their clients. But I also believe human nature is bent, and good intentions often succumb to repeated temptation.
The fees of commission-based agents and brokers are tied to specific products and transactions. This model misses completely much of what clients need. Although even commission-based agents can serve their clients in unique ways, product commissions seem a backhanded way to acquire comprehensive wealth management.
The Center for Fiduciary Studies agrees. In its Prudent Practices for Investment Advisors, the seventh fiduciary precept is to “avoid conflicts of interest.” We structure our primary fee structure around managing all of a client’s financial affairs. Many of the services we perform for clients depend on an integrated plan that goes beyond investments. Trying to answer one issue in isolation can be difficult. Our services strive to be more holistic. We primarily charge a percentage of assets under management because of our emphasis on offering comprehensive wealth management. But fee-only financial planning includes other methods of charging clients such as a flat retainer, an hourly rate or a charge specific to the task at hand.
For managed clients, we purposely don’t add any hourly rate. We do not want clients to hesitate to contact us. If there is an hourly charge many clients won’t call even when they should. Another advantage of a fee-only financial planner is that there are no financial hooks, surrender charges or lockup periods. Clients are free to leave at any time if they are disappointed. It is also why we give away as much do-it-yourself information as we can. We want consumers to be as informed as possible about good wealth management techniques.