Most of the articles you read about finding a financial planner today discuss whether or not the advisors you’re interviewing are “fee only.” These articles typically come to the same conclusion – the advisors you’re interviewing should be fee-only. As a fee only advisor myself, I couldn’t agree more with this.
Unfortunately, it’s not always easy for consumers to figure out who’s fee only and who isn’t. The financial services industry can be incredibly confusing for advisors who are part of the financial planning profession. Trying to navigate different fee models and understanding what they mean for you as a client can be even more challenging. So, let’s dive into what it means to be fee only, and why I believe it’s the best way to always put my clients first.
Defining Fee Only
A fee only financial advisor is, simply put, an advisor who is only compensated by fees their clients pay them. There are typically three types of ways that advisors are compensated:
Fee only advisors are paid only by their clients. Fee based advisors are paid by a combination of the fees their clients pay and commissions they make from selling financial products – such as investments or insurance policies. Finally, commission-only advisors are paid entirely by the money they make as a commission for selling financial products.
Conflict of Interest
Obviously, fee based and commission advisors present a problem for their clients – how can you, as a client, know that your advisor has your best interest at heart if they’re making money by selling you specific financial products? Advisors who are making a commission aren’t always “the bad guys.” Often, they have the best of intentions.
Unfortunately, good intentions aren’t good enough when it comes to your financial future.
Financial planning clients deserve to work with advisors who will always put their clients’ interest before their own. Even if a fee-based or an advisor who is paid on commission claims to always have your best interest at heart, you just can’t be sure. If they’re in a pinch, they might put making money for themselves over helping you make the decisions that will successfully move you toward your goals.
Fiduciary vs. Suitability
We’re really getting into the weeds with this now, but it’s because I genuinely believe it’s important for everyone looking for a financial planner to know exactly what they’re getting into. Fee only advisors abide by a fiduciary standard. This means that they’re legally obligated to put their clients’ best interest before their own. However, many advisors out there abide by the suitability standard.
This is where people often get confused – the two standards seem so similar, and frankly the industry doesn’t do a fantastic job of providing clarification. The suitability standard states that an advisor has to do what is suitable for their client. However, many financial decisions can technically be “suitable” without being the best possible path available.
Take, for example, advisors who make a commission from selling insurance products as a method of financial planning. Insurance products have a time and a place in your financial plan, but they’re not the only option – far from it! But if an advisor is receiving commission, and they know a product will move you toward your goals, they’re more likely to sell you the product than to suggest an alternative option (that doesn’t earn them a commission).
The best analogy I’ve heard for the fiduciary and suitability standards compares an advisor to a doctor. Your doctor should always be recommending what’s best for you and your unique goals and health. Now, let’s imagine that your doctor had a contract with a local fast food chain. Every time they send a new customer their way, your doctor receives a 10% commission. They may be much more likely to recommend that their patients go indulge in a burger at this specific food chain every once in a while, right? Technically, under the suitability standard, this would be okay. Burgers aren’t healthy food, and the vast majority of doctors wouldn’t endorse you indulging at the local greasy spoon semi-regularly. However, burgers are technically food. They will sustain you, even if they won’t help move you toward your health goals very quickly. Because they’re suitable, the doctor would be able to recommend weekly burgers under the suitability standard. Under the fiduciary standard, this doctor would never recommend eating a burger but suggest a healthier option.
Why Does It Matter?
As the founder of Retirement Matters, I believe that financial advisors should be compensated on a fee-only model. I want my clients to know that every piece of advice I give them, no matter how small, is always in their best interest. I believe in the value of financial planning, and I know that there are so many “advisors” out there who are in the business to make money, not to provide financial advice and planning that can make a positive impact on the lives of their clients.
Are you looking for a financial planner? Don’t hesitate to contact me – I want to help. Knowing what to ask, and what to look for when you talk to different candidates can empower you to partner with a planner who is genuinely working for you.