What Is a Fee-Only Financial Planner?
Creating a financial plan is a pivotal step to wealth building. However, you’ll want to carefully consider how your financial planner is compensated. Are they offering you advice that is in your best interest or their own?
There are two main ways that financial planners are paid. One is commission, the other is fee-based. The difference between the two can have a significant impact on your investments.
Fee-based Compensation
Financial planners who earn money through fees are paid directly by those who seek their advice. In other words, you’ll pay them for their time. In turn, they will offer you advice, help you put your plan into place, and manage your assets.
In the financial industry, they have a fiduciary duty, which means an advisor has a legal obligation to you, the client, rather than to an institution, broker, or dealer. They must put your best interests first and cannot advise you to buy an investment product that isn’t in line with your needs, goals, or risk tolerance. Additionally, they need to be upfront with you when recommending investments, including making you aware of any conflicts of interest they have.
Although it costs you money, there is a significant benefit to working with a fee-based financial planner. Fee-based financial planners are required to be transparent about their fees, which means you’ll know upfront how much you’ll be paying for their services. Moreover, they have a vested interest in seeing your wealth grow because as you earn more, so do they. The more money you make, the more they will be compensated. The advisor and the client are on the same side of the table in a fee-only relationship.
There are different payment models that fee-based financial planners use, including:
- Hourly rate
- Retainer
- Percentage of assets/assets under management (AUM)
- Flat fee
Commission Financial Planners
Unlike a fee-based financial planner, commission financial planners earn their money by selling their client products. Thus, their interest is not primarily in seeing you grow your wealth. Commissioned advisors do not have a vested interest in your money growing because they are being paid to promote products to investors. There is a conflict of interest as their goal will be to sell as much of their products as possible, in order to increase their own income. The more financial products they sell, the more they’ll earn. This includes investments like mutual funds, insurance, etc.
A commission-based financial planner is not under a legal obligation to you but rather to their employer, broker, or dealer. It means they don’t need to make you aware of any conflicts of interest they might have in the product they are recommending to you.
Benefits of Working with Fee-Based Financial Planner
Wealth building is not just for the rich. According to the numbers, 55 percent of people invested in the stock market last year. That includes one out of every five households that have earnings less than $35,000/year. Yet only 17 percent work with a financial professional, and many have been losing money by going at it alone.
Seeking the advice of a financial planner can help you ensure your money is working hard for you, whether you are investing $100,000 or $10,000. But you’ll need to be putting it in the right places to get the best returns. Working with a fee-based advisor means you won’t be pressured to buy products or investments that are not right for your situation. Additionally, fee-based advisors let you access a wide array of products rather than limiting you to those who pay the highest commission (commission-based advisors).
Another benefit of working with fee-based financial planners is that you can trust they are objective about your finances and wealth-building opportunities. For example, if you’re looking at creating a retirement plan, you can have confidence in your retirement strategy.
Many people overlook that financial planners are not just for your personal wealth, but small business owners can also benefit from talking to an advisor. Financial advisors can work with you to develop a retirement plan that’s right for you. They can also help you create a strategy to improve your business’s financial health and future growth.
Questions to Your Financial Planner
Finding the right financial planner for you may take a little time. You’ll want to work with someone you can trust to act in your best interest. Looking for a financial planner with the right qualities will enable you to feel confident in their wealth management skills.
Aside from finding out how they are compensated, here are some other questions to ask your financial planner:
- What qualifications/training do you have?
- What is your approach to investing and wealth management?
- Are you bound by Fiduciary Duty?
- Do you require a minimum investment by clients?
If you are searching for a financial planner that puts your interests first, contact IronOak Wealth advisors today.
