Fee-only financial planners earn compensation for their services only. They don’t earn commissions or kick-backs for recommending certain products. This fee structure reduces potential conflicts of interest, which is why fee-only financial planners are viewed as the most reliable financial advisors. They have a fiduciary duty to act in your best interests at all times.
What Is a Fee-Only Financial Planner?
Fee-only financial planners are exactly what they sound like. They are financial advisors who operate on a fee-only basis. They typically collect fees from only you as a percentage of your assets under management. Fee-only advisors don’t receive any fees, commissions, referral fees, kickbacks or any other hidden forms of compensation.
This payment structure can reduce the chances that the advisor will encounter a conflict of interest. Fee-only financial planners don’t earn additional compensation by recommending one investment product over another.
In fact, fee-only financial planners work according to their fiduciary responsibility, meaning they must act in their client’s best interests.
If you’re wondering about the alternative to fee-only advisors, there are two. One alternative is a financial planner who is paid by commission. These advisors earn their income based on the products they sell and the accounts they open. In this setup, more of the right transactions equals more money in their pockets. Companies like brokerage firms, insurance companies and mutual funds firms may pay commission fees to these advisors.
The second alternative is a fee-based financial planner. This term is often confused with fee-only planners, but the two types of advisors operate differently. Fee-based advisors charge their clients a fee in addition to collecting commissions.
Fee-Only Financial Planner Pros
The best part of working with a fee-only financial planner is knowing that they are there to serve your best interests. They are there to help you out with your finances and not their own. Fee-only advisors don’t rely on what they sell to you to make money. They must operate as a fiduciary, guaranteeing they will work for your best interests. They won’t push a product or strategy that doesn’t serve you best financially.
“That doesn’t guarantee that you’ll get good advice, but it improves the odds of getting advice that’s genuinely intended to be in your best interests,” Matt Becker, a certified financial planner™ (CFP) and author of the blog Mom and Dad Money, told SmartAsset.
Without any ties to specific companies, fee-only financial planners are free to offer a wider array of solutions to help you reach your goals. On the other hand, commissioned planners tend to limit their suggestions to products that will earn them the most money. Some are even tied to specific services their company provides, meaning you won’t get the holistic advice of a fee-only planner.
Another benefit is the range of services fee-only financial planners can offer without overcharging you. Fee-only advisors tend to charge an hourly rate or a fee based on the service. This means they can help you with as little as one investment or develop a complete financial plan, and you won’t have to overpay. In some cases, a fee-only advisor will charge you a percentage of your assets that they manage. While they should still work in your own interests, they might have a slight incentive to keep your assets high. That way, they continue to earn a solid percentage.
Fee-Only Financial Planner Cons
There are downsides of using a fee-only financial planner. First off, the fees may be higher than with advisors who also earn commissions. There is also the fact that a fee-only financial planner by nature has fewer services than one who earns commissions for selling insurance or securities. While this might eliminate conflicts of interest, it does mean you’ll have to deal with another professional for executing trades and for buying any insurance you want to use.
How Much Does a Fee-Only Financial Planner Cost?
Fee-only financial planners charge their clients in a few different ways. The most common method is called “assets under management,” where your planner takes a percentage of the assets they manage. In this way, you would see an amount debited out of your account every quarter. Becker notes that advisors tend to use this method with “clients who have significant investment assets that need to be managed, particularly those nearing or in retirement” in order to make the fee worth it.
Another method is to charge an hourly or monthly rate. While this ensures you pay for what you get, sometimes you don’t want to pay for a quick visit or phone call. Other fee-only advisors can charge clients with a flat fee or a fee according to what services they need. These kinds of payment plans allow advisors to work with a “more diverse set of clients and address a more diverse set of financial needs,” according to Becker.
It’s important to note that there are financial planners who work only with high-net-worth clients. This means that they will end up costing more, since they are working with more assets.
The exact cost of a fee-only financial planner will depend on the way they charge their clients, the services you require and your location. More experienced advisors may charge higher fees as well. Generally across the U.S., fee-only financial planners will charge between $150 to $300 an hour and between $1,000 to $3,000 annually.
How to Find a Fee-Only Financial Planner
When it comes time to find your financial planner, a good place to start is asking your colleagues, friends and family. It’s especially important you ask people who are in the same financial situation as you. That way they can recommend the right kind of advisor.
SmartAsset has a free financial advisor matching service you can use to find an advisor in your area.
You should also visit the National Association of Personal Financial Advisors’ (NAPFA) website. NAPFA is an organization that guarantees advisors who work for your best interests. To become a NAPFA-registered financial advisor, advisors need experience and a fiduciary duty. All NAPFA-registered financial advisors operate on a fee-only basis. You can easily use NAPFA’s online search tool to find a local and experienced fee-only advisor.
The Garrett Planning Network is another fee-only planner organization. These advisors charge at an hourly rate. Due to the overlap of company missions, some GPN members may be a member of NAPFA as well.
The Certified Financial Planners Board also has a directory of planners with advisory qualifications. Being a CFP doesn’t guarantee fee-only service, but it does guarantee educated, experienced and ethical advisors. The CFP Board also provides search tools to help you find an advisor whether you want a fee-only, fee-based or commission-based advisor.
Questions to Ask a Financial Advisor
Once you’ve narrowed your list to 10 or so potential advisors, you’ll want to do your homework to find the best fit. If possible, set up an initial meetings before signing a contract. Most planners won’t charge for this. This meeting, a kind of interview, provides an opportunity to ask key questions of your potential advisor. Ask about their experience, education, any criminal background, their specialty, their services and anything else you find relevant. Meeting in person will also give you a good sense of how you and the advisor would work together.
Becker says that “financial planning is an intensely personal process that touches all aspects of your life, and you need to trust the person you are working with. If anything feels off, don’t hesitate to go in another direction.”
Before you get overwhelmed with your financial planner search, it’s a good idea to start with the fee-only planners. That way, you have a guarantee the advisors you begin with will already have a fiduciary responsibility. You also know that they won’t have any incentives to sell you a product or service for their own gain. Fee-only financial planners offer the most upfront payment method of financial advisors. Getting good financial advice may seem expensive, but it will be worth it when your finances are successfully managed and planned.
Tips for Finding the Right Financial Planner
- Before you dive into the directory looking for a financial advisor, you’ll need to determine what it is you want from an advisor. Are you ready to get into investing with one of the best brokerage accounts? Do you want the advisor to manage your investments for you? Do you need help creating a budget?
- Finding the right financial advisor that fits your needs doesn’t have to be hard.. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/Petar Charnaev, ©iStock.com/Rawpixel Ltd, ©iStock.com/Portra