We write frequently about the value of having a fee-only fiduciary as your financial planner.
In this article, I compiled others’ voices on this same issue. Below are quotes from the linked articles with my emphasis added.
The summary: It is important to limit your search for a financial advisor to just those who are fee-only.
Wall Street Journal
“Finding the Right Adviser For Your Little Nest Egg ” by Jonathan Clements in the Wall Street Journal:
I know this will garner me a truckload of hate mail. But let’s be blunt: You never want to pay a broker or financial planner with commissions.
Why not? If you go that route, the adviser has a huge incentive to stick you in products that generate the fattest commissions and to cajole you into buying and selling, because that’s how the adviser makes the most money. But what’s good for commission-charging advisers is often bad news for the investors involved.
“OK, I Admit It. I Need Some Help ” by Glenn Ruffenach in the Wall Street Journal:
I know I want a “fee-only” adviser and not a “fee-based” adviser. (There’s a big difference; the former tends to have fees that are easier to understand.) And I know I want an adviser who acts as my “fiduciary,” who puts my financial interests ahead of his or her firm’s.
(All financial advisers are not created equal: certified financial planners, brokers, insurance agents and “financial counselors” can have very different obligations and agendas. Failing to understand these distinctions is asking for trouble.)
“Protect That Nest Egg ” by Glenn Ruffenach in the Wall Street Journal:
Fee-only planners, who typically make their money by charging an hourly rate or by collecting a percentage of assets managed — as opposed to financial advisers who work on commission — clearly are finding more favor within the industry.
“Getting Answers to Questions On IRAs, Roths and Planners ” by Terri Cullen in The Wall Street Journal Online:
As for finding a planner, one caution: Don’t hire a salesperson. Investment brokers, life-insurance and variable-annuity agents, and other so-called financial advisers who work for, or are paid on commission by, financial-services companies are there to sell product. Your best interests come second to their bottom lines. Instead, seek out an objective fee-only financial planner …
“‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone ” by Jason Zweig in the Wall Street Journal:
Up to 11% of certified financial planners who work at big firms call themselves ‘fee only’ when, by definition, they can’t be.
The CFP Board’s standards of professional conduct say that a CFP® professional can describe his services as “fee only” if—and only if—all his compensation comes from fees. And if any “related party”—such as the adviser’s parent company—receives commissions, then the adviser can’t use the term “fee only,” the CFP Board’s standards say.
However, The Wall Street Journal’s analysis finds that many of the CFPs listed on LetsMakeAPlan.org who work at major Wall Street banks and brokerages have been identifying themselves as “fee only.” Among the firms: Morgan Stanley, UBS, J.P. Morgan Chase, Bank of America Merrill Lynch, Wells Fargo, LPL Financial Holdings, RBC, Raymond James Financial and Ameriprise Financial. At those firms alone, the Journal identified 661 listed CFPs who call themselves “fee only.”
“How to Pick a Financial Advisor ” by Bernice Napach in Buy Side from the Wall Street Journal:
Under the SEC’s Best Interest rule, advisors can say they are putting their client’s interest first so long as they disclose how they’re paid, any disciplinary history and incentives to sell certain products. That’s why many consumer advocates recommend sticking with fee-only advisors.“With fee-only you can be confident that you are dealing with a real fiduciary,” says Rostad.
Forbes
“What Is A Fee-Only Financial Planner?” by Jordan Tarver in Forbes Online:
There are benefits to working with a fee-only financial planner. The National Association of Personal Financial Advisors notes that this compensation structure is the most transparent and objective structure available. By being fee-only, these financial planners usually work under fiduciary duty, meaning they have your best interests in mind when suggesting products.
By not working on commission, fee-only financial planners are less likely to engage in conflicts of interest by pushing products that may not be best suited to your financial needs, but that will generate income for them.
Kipplinger
“What Fee-Only Financial Advice Really Means – and Why It Matters ” by Pam Krueger in Kipplinger:
When you hire a fee-only fiduciary investment adviser to manage your investments, develop a financial plan, or both, you alone are paying a financial professional who is legally and professionally committed to acting solely in your best interests — otherwise known as the fiduciary standard. They don’t get paid by investment or insurance companies to sell their products. …
Financial planning fees are based on complexity and time spent to develop a detailed plan. You can expect a fee-only adviser to analyze your current and projected income and expenses (cash flow needs), and your short- and long-term financial goals and recommend ways to balance saving and spending, shrink your debts, reduce your tax bill, protect your assets and optimize your investments. Most of these advisers are CERTIFIED FINANCIAL PLANNERTM (CFP®) professionals.
The fee for an adviser to set up a financial plan starts at around $1,500. More complicated plans that involve estate and tax planning can run $15,000 or more. Once you have the plan, you can then implement the investment recommendations yourself or ask the adviser to execute and manage your portfolio. Many advisers waive the cost of a financial plan if you hire them to manage your assets.
Nerd Wallet
“10 Questions to Ask a Financial Advisor ” by Andrea Coombes in Nerd Wallet:
Advisors can use a variety of fee structures. To keep it simple and avoid conflicts of interest, focus on fee-only advisors. They don’t get commissions for selling products.
“Make sure it’s fee-only — those particular words,”
“3 Reasons to Hire a Fee-Only Financial Planner ” by Andrea Coombes in Nerd Wallet:
Fee-only planners typically have fewer conflicts of interest, focus on advice and offer flexible payment models.
“Fee-Only Financial Planner vs. Fee-Based: What’s the Difference? ” by Kevin Voigt in Nerd Wallet:
A fee-based financial planner gets paid by the client but also via other sources, such as commissions from financial products that clients purchase. This can set up a conflict of interest, as the advisor charges you for advice while steering you toward investment products from which the advisor profits.
Ask if your financial planner is a broker or a dealer, also known as a registered representative. These planners are generally held to a lower legal standard, which simply requires them to sell products that are “suitable” for their clients. …
We recommend choosing a fee-only financial planner who follows the fiduciary standard.
The Balance
“What is a Fee-Only Financial Advisor? ” by Dana Anspach in The Balance:
Many reasons exist as to why you’d want to consider a fee-only advisor to help you build out your financial life. …
A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or any other source besides you, the client. They represent you and your interests when giving you advice. When you think about where someone’s paycheck comes from, that can give you a hint as to where they’ll place their loyalty.
Money Under 30
“When Is It Time To Hire A Financial Advisor?” by David Weliver in Money Under 30:
Finally, some financial advisors earn their fees not from clients, but from banks and investment companies. Generally, these are the advisors you’ll find sitting at your local bank or affiliate with a large brokerage firm.
Although they offer “free” advice, which may be tempting, these advisors usually earn commissions from the investment they sell you. Over time, being in the wrong investments may actually cost you more than paying a fee-only advisor.
John Bogle
“Testimony before Congress ” Testimony of John C. Bogle, Founder of the Vanguard Group, Before the Finance Committee of the United States Senate, September 16, 2014:
Surely it should be clear to clients whether they are relying on a trained investment professional, paid solely through fully disclosed fees, or a sales rep who sell the products and services of the company he represents, whether life insurance, annuities, mutual funds, or anything else.
William Bernstein
“The Four Pillars of Investing” by by William J. Bernstein in his book The Four Pillars of Investing:
The best, and only, way to make sure that you and your advisor are on the same team is to make sure that he is Fee-Only, that is, that he receives no remuneration from any other source besides you. Otherwise you will wind up paying, and paying, and paying, and paying…
Clark Howard
“How to find a fee-only financial planner” by Christopher Smith in Clark.com:
I want to warn you away from another term: ‘fee-based planners.’ These salespeople start with a fixed fee, but the commissions on products they may sell you defray those initial costs, which again, may not be in your best interest. Honest commissioned salespeople will rise above their personal interests and sell what’s right for you.
The stakes are so high in investing that you should consider fee-only planners. They’ll give you a fixed price up front for their services, regardless of the product they recommend. You won’t have to worry about conflict of interest.
Investopedia
“What You Need to Know About Fee-Only Financial Advisors” by Roger Wohlner for Investopedia:
One of the major benefits of selecting a fee-only advisor is the freedom from the inherent conflict of interest that can arise when a significant portion of the advisor’s income comes from selling financial products to you. The concern you should have as a potential client is whether or not the advisor is recommending a certain investment because it enhances their bottom line and if the products recommended are truly in your best interest.
In fact, there are some registered reps and others who earn all or part of their compensation via commission that may be required to favor products offered by their employer—which may or may not be the best investments for your portfolio strategy.
Since fee-only advisors do not sell commission-based products, receive referral fees, or collect other forms of compensation, the potential for conflicts of interest is limited. For this reason, many recommend that you only work with a fee-compensated advisor.
One Day Advice
“Don’t be fooled! Here’s the difference between “fee-only” and “fee-based” financial advice ” in onedayadvice.com:
You’ve already read on the internet today about what you need to be watchful of when looking for a financial advisor. You know that you need to find a fiduciary that will put your interest ahead of their own. You begin interviewing advisors and you ask them the important question, “Are you a fee-only advisor?” The advisor then responds by saying that he is “fee-based” and looks out for his clients’ best interest. You then feel relieved because you think you may have found the right advisor.
This scenario happens all of the time because the vast majority of advisors out there operate on a fee-based arrangement. The term “fee-based” came about because advisors at large brokerage firms needed a way to respond to inquiries about whether or not they were compensated through fees. The term sounds so similar to fee-only that it’s easy to be led into believing that it is the same thing (just another win for the large deep-pocketed brokerage firms!). Being a fee-based advisor means that they have the option to provide advice on either a fee basis (like a percentage of total assets that they manage) or on a commission basis. Remember, this is the exact conflict of interest that you are trying to avoid! I’m not saying that there are not good advisors out there who operate a “fee-based” business model, but I do hope this serves as a warning to you that you may need to gain a deeper understanding of how you are going to be charged if you decide to work with them.
Finance Buzz
“Fee-Only vs. Fee-Based Financial Planner: Which Is the Smarter Choice? ” by Alaina Tweddale in Finance Buzz:
It may seem like a fee-only financial planner is always the right choice for every investor, but that isn’t the case.
Fee-only planners can be expensive. Your fee is their only compensation, and they often work only with higher-net-worth clients. The minimum asset level will vary by advisor, but many beginner investors may find themselves either priced out or unable to meet fee-only client minimums.
However, fee-based financial planners may be able to help a novice investor develop a first-time financial roadmap, perhaps for a small flat fee, and then suggest commission-paying products that can meet the financial goals discussed. For an early stage investor, this fee structure may be more palatable and even less expensive.
Still, there are other options available for those just getting started with investing money.
“Why You Should Only Work With a Fee-Only Financial Advisor ” By Roger Wohlner in Finance Buzz:
If you’re looking at fee-only vs. fee-based financial planners, they may sound similar, but they’re compensated in different ways. Fee-based, also known as fee and commission, is a hybrid of fee-only and commission-based. This could arise when the advisor charges a fee for an initial financial plan and implements any recommendations made in the plan with financial products that generate a commission for them.
Best Wallet Hacks
“How to Find a Fee-only Financial Advisor – And Why it Matters ” by Kevin Mercadante in Best Wallet Hacks:
You’ll be able to request ongoing advice from the advisor without concern he or she may steer you into financial products designed primarily to earn a commission. …
How to Research Fee-only Financial Advisors
Start the process by searching the National Association of Personal Financial Advisors (NAPFA). It’s a database of fee-only, fiduciary financial advisors nationwide. By entering your ZIP Code, you’ll have access to qualified personal financial planners in your area. …
In evaluating which advisors you want to work with, look for professional designations. One of the most common is Certified Financial Planner, or CFP. To earn the designation, financial planners must have a bachelor’s degree and take specific coursework. They’re then required to pass an examination to receive their certification.
To limit your search among CFP professionals to just those financial advisors who are fee-only fiduciaries who practice comprehensive financial planning, look for a member of the the National Association of Personal Financial Advisors (NAPFA). We explain how in our article, “How To Find A NAPFA-Registered Advisor In Your Area.”
Photo by Megan Russell
