It’s a popular question – “Why should I hire a fee-only financial advisor?”
Maybe you shouldn’t hire a fee-only financial advisor. Seriously, there are people who do not need a financial advisor.
It’s not for everybody. I’ve met plenty of people in my career who are doing a great job of staying on top of their investments, financial planning, tax planning, and more.
They find joy in doing the research, acquiring the knowledge, and spending the time. They also are not stressed out by making life-changing money decisions.
As a former colleague used to say, you should have the time, temperament, and talent to manage your financial life. If you do, you don’t need a financial planner.
Unfortunately, the financial industry does not have clear titles, compensation disclosures, or clear ways of understanding conflicts of interest.
Let’s make sense of the industry jargon and four reasons why you may want to hire a fee-only financial advisor to help you make the best decision for yourself.
What Does Fee-Only Mean?
First, let’s define fee-only financial planning.
Fee-only means a financial advisor is only compensated by what a client pays. They are not paid commissions, referral fees, or other forms of compensation based on the strategies or products they recommend.
Why would you want to hire a fee-only financial advisor?
Reason 1: Less-Biased Advice and Fewer Conflicts of Interest
Although you may read that fee-only financial advisors provide unbiased advice, I won’t go that far. Every advice is biased to some extent based on our own experience, but fee-only financial advisors provide less-biased advice.
As you can imagine, a fee-only financial advisor is going to have less-biased advice because they don’t get paid more or less based on the advice they give.
Other financial planners who are not fee-only have more conflicts of interest because they may get paid more if you go with Strategy A versus Strategy B.
All Financial Advisors Have Conflicts – The Goal is to Reduce Conflicts
To be clear, fee-only financial advisors have conflicts, too.
If a fee-only financial advisor charges hourly, there is an incentive to bill more hours. If a fee-only financial advisor charges assets under management fees, there is an incentive for money to stay in the portfolio or to take more risk with the investment portfolio. If a fee-only financial advisor charges a flat fee, there is an incentive to do less work.
Every method of billing has conflicts of interest, but fee-only financial advisors have less conflicts of interest than commission or fee-based financial advisors in the advice they provide.
You could imagine how if a financial planner only could select among 10 different products, they might be more inclined to choose the product with an 8% commission instead of one with a 5% commission, even if the 5% commission product would be better for the client.
I’m not saying all financial advisors do this, but I’ve seen people buy really terrible products with high commissions that weren’t appropriate.
People can’t eliminate conflicts or bias entirely, but it’s better to work with someone, such as a fee-only financial advisor, who has reduced them.
Fee-Only Does Not Equal Fiduciary
Something to keep in mind is that fee-only does not equate to a fiduciary. A fiduciary has a legal obligation to put a clients’ interest first. You should always ask if your financial advisor is a fiduciary 100% of the time. There are other questions I’d recommend asking before hiring a financial advisor.
At the end of the day, you want to pay for advice – not a product. With fee-only financial planners, you are usually paying for advice – not a product.
Reason 2: More Holistic or Comprehensive Advice
I know, I know. Everybody claims to provide holistic or comprehensive advice now.
It’s nearly impossible to distinguish who actually provides comprehensive advice and who doesn’t.
The way I look at it is if someone works for a large corporation, they likely can’t provide holistic or comprehensive advice, even if they say they will.
Think about any large corporation you’ve ever done business with.
Usually, there are limited packages or options, scripts are followed, and you might hear “we can’t help you with that.”
Big Banks and Brokerage Companies
Without naming names, any of the large banks or brokerage firms have “financial consultants”, but they aren’t really a financial planner. They are a salesperson.
They usually have hundreds or thousands of clients, and their main job is to get someone into a strategy, solution, or product. Usually, those strategies, solutions, or products pay them differently. Very few of those companies only pay their employees a salary.
Most offer compensation based on what is sold or bonuses if they meet certain benchmarks.
It’s hard to provide comprehensive advice when your livelihood depends on you selling a solution – not providing advice.
Fee-only financial advisors usually have more than the limited menu of options offered by non-fee only financial advisors.
Education and Full Menu of Options with a Fee-Only Financial Advisor
As a fee-only financial advisor in Madison, Wisconsin, I get the opportunity to refer clients if there is a need for a product. For example, if someone needs a long-term care insurance policy, I can make a referral to an insurance agent who can help shop around multiple insurance carriers.
If someone needs an annuity or wants to learn more about annuities, we can talk about them before meeting with an insurance agent. They can learn the ins and outs of them and then decide if they want to talk with someone who can sell it to them.
Since I am not selling it to them, there is more of an opportunity to ask questions and get educated without sitting through a sales pitch where an insurance agent may have the title of “financial advisor” and claim to offer advice, but the solution is always that company’s annuity.
Large brokerage firms and insurance companies may employ financial advisors, but it is often only to sell their own products, strategies, or mutual funds where they receive compensation. Rarely have I seen them offer comprehensive advice that can touch on insurance planning, tax planning, and estate planning.
Their advice is usually limited to investments and very basic financial planning.
As a fee-only financial planner in Madison, Wisconsin working with clients virtually across the United States, I am blessed to be able to look at a wide variety of strategies and suggest which ones I believe will best help my clients achieve what they want to accomplish.
Reason 3: No Commissions
Commissions are a big umbrella, encompassing many different types of fees.
You may have heard commissions in the context of buying a mutual fund, where it might have a 5% load, so if you invested $100, only $95 would be invested and $5 would be paid to the advisor who sold it to you.
Commissions come in many forms now.
Commissions could include:
- Commissions for investments (private REITs, mutual funds, etc.)
- Commissions for insurance products (life insurance, disability insurance, annuities, long-term care insurance, etc.)
- Referral fees
- Margin loans
- Home Equity Line of Credit (HELOC)
- Pledged Asset Line (PAL)
Example 1: HELOC
Your “financial advisor” makes a referral to an affiliate bank where you open a HELOC. Your “financial advisor” may receive payment for that referral.
Example 2: Margin
Your ”financial advisor” recommends you open a margin account and borrow from your brokerage account. They may receive compensation for the amount you borrow, or even just having it open.
Example 3: Private REIT
Your “financial advisor” recommends a private REIT. They may receive a 10% commission of the amount you invest.
Example 4: Professional Referral Fees
Your “financial advisor” recommends you work with a certain CPA or attorney, and they receive benefits or compensation in return for that referral.
Example 5: Investments
Your “financial advisor” recommends certain mutual funds or ETFs for your portfolio. They may receive higher compensation for those mutual funds than other ones because of a compensation arrangement.
Example 6: Payout Grids Affect Recommendation
Your “financial advisor” recommends one investment strategy over another. You find out it might be because they moved to a new payout grid for that product where they earn double.
Example 7: Insurance Product
Your “financial advisor” recommends a life insurance product. Depending on the type of product, they may receive a big payday if you buy that policy.
As you can see, in the financial world, compensation is complicated and can come from many places. It’s usually somewhere in the fine print, but it can be hard to spot unless you read through everything.
Fee-Based Does Not Mean Fee-Only
One term you may encounter is “fee-based” as you search for financial advisors. “Fee-based” means the financial advisor can receive commissions. They may be paid based on what a client pays them, but they may also receive compensation for insurance products and other recommendations.
“Fee-based” is not “fee-only”, which is important to recognize.
Fee-only financial advisors receive no commissions, referral fees, or any other forms of compensation. They are only paid by the client directly – based on hourly, assets under management, flat fee, or another calculation arrangement.
Reason 4: Transparent Fees
Fee-only financial planners charge transparent fees, which is often overlooked.
Remember, if the strategy is free, you are the product. There are plenty of reasons not to go with free products.
Why Free Isn’t Always Free
For example, one robo advisor offers “free” portfolio management, but they require a large cash holding. Let’s say you have 10% in cash and your portfolio goes up 10% in a year.
The cash could have earned 10%, but because it was in cash, it may have earned nothing. In that case, the opportunity cost is equal to about 1%. You could consider that your opportunity cost fee.
Wouldn’t it be better to pay for a service where your cash could be more fully invested and directly pay for a fee? You might get more holistic advice.
Another example is zero expense, or free, mutual funds. There are investments that have an expense ratio of 0%, but they can’t be held anywhere but the custodian who created them. That means if you want to consolidate accounts to another custodian, you may be forced to sell and incur a big tax liability or keep your account open.
In the financial world, there are usually many “gotchas” and layers of hidden fees and compensation arrangements buried in the fine print.
Transparent Pricing – Hourly, AUM, and Flat Fee
Fee-only financial advisors have transparent fees.
If you pay hourly, you know you are getting billed for the time. You usually can get an estimate of a project, too.
With assets under management, you are being billed for the assets being managed. You usually have an idea of what that is year-to-year based on how markets perform.
If you pay a flat fee, you know how often you will be billed and what amount.
There are no commissions or other hidden fees.
Final Thoughts – My Question for You
Hiring a fee-only financial advisor is not an easy decision to make, particularly for people who have been managing their finances.
Although not everyone needs or wants to work with a financial advisor, for those that do, hiring a fee-only financial advisor is a good route.
You will usually receive less biased advice and more comprehensive advice.
Plus, you’ll likely have better peace of mind knowing they don’t receive commissions and have transparent fees.
You’ll know exactly how you are billed without needing to read what feels like endless pages of disclosures highlighting conflicts of interest.
I’ll leave you with one question to act on.
If you were to hire a fee-only financial advisor, which reason resonates most with you?
