INVESTING

What Is a Fee-Only Financial Advisor?

DEFINITION

Financial advisors who are fee-only are paid directly by their clients.

What Is a Fee-Only Financial Advisor?

There are three fundamental models that can be used to determine how financial advisors should be paid:

  • Commission-based The entire compensation comes from commissions on the goods they offer.
  • Commissions and fees (also called fees-based): Advisors are compensated primarily through fees from clients, and a portion by commissions.
  • Fee-only Advisors are paid by clients, and are not paid any specific commissions for a particular product.

Note

Fee-only financial advisors may arrange their fees in various ways, such as hourly rates as well as flat fees or the percentage of assets or the retainer. 1

Fee-only advisors are the only one of the three who receives a compensation which is not based on the products they offer. Because of this, it is often regarded as the one that easily adheres to the fiduciary standard.

  • Alternate name: No-commission financial advisor

The Fiduciary Standard

Fee-only advisors, also known as fee-only financial planners almost always function as fiduciaries. This means that they must legally offer recommendations that are in their clients’ best interests.

Many people believe that all financial advisors are subject to an obligation to offer advice that is in the client’s best interests however that’s not necessarily the situation. The large portion of the advice industry is based according to the basis of a “suitability norm.”

Suitability is the term used to describe a recommendation that must be appropriate in light of your financial situation and goals however, if one of the products offers a higher amount of commission to the advisor than the other and both are acceptable for you, the advisor is able to suggest the one that pays more commissions however it might not be the most appropriate option for you based on two choices. 2

Note

Consider asking a potential advisor whether they are operating under the fiduciary obligation to you or in accordance with the appropriateness standard. Only the fiduciary is legally bound to consider your best interests first.

In 2017 in 2017, the Department of Labor issued a new Fiduciary Rule to implement the fiduciary standard to nearly all financial advisors that offer advice regarding retirement accounts. The new fiduciary rule however, does not apply to the advice given regarding investments that are not part from retirement funds. After a number of court battles it has been in doubt since 2018 and a new version of the rule will be re-examined at the end of 2020. 

 

How Fee-Only Financial Advisors Work

If you are thinking about where the money comes from it can provide an idea of where they’ll be loyal. A fee-only financial advisor can’t be compensated by the brokerage company or a mutual fund company or insurance company or any other entity other than you as the client. They represent your interests when providing guidance.

A fee-only advisor could be charged a fee determined by a portion of their assets managed on your behalf and then take it from your account each quarter or they could be charged a flat annual fee or hourly fee. 1 Make sure you know the way an advisor’s fee structure will work before establishing working with them.

 

Fee-Only Financial Advisors as opposed to. Fee-Based

A fee-based financial adviser may be paid fees by you as well as commissions that are that are paid through a brokerage firm or mutual fund company insurance company and investment partnerships. The advisor should be able to disclose the fees to you.

A lot of advisors who employ”fee-based” as a term “fee-based” advocate something they refer to as managed accounts. managed account. It is important to be aware of the fact that investment options included in the managed account might give incentives to the firm that the advisor is employed by This means that it might not be as impartial as it seems.

Although both fee-only and fee-based financial advisors can manage accounts in which they charge fees in the form of percentages of the assets but the investments they put within these accounts may differ.

Fee-only financial advisors are under an obligation of fiduciary to select the right investments for you best for your interests. They generally choose investments with low internal costs, like no-load mutual funds bonds, stocks and other investments that do not charge annually 12(b)1 (marketing or distribution) charges.

Note

No matter how they earn their income Financial advisors vary in the kind of services they provide. Some specialize in investment management services, while others provide financial planning as a component of their offerings. Certain advisors specialize in specific fields, for instance advisors who specialize in retirement planning. Determine the kind of financial services you require to know the type of advisor you should seek out.

 

Locating a Fee-Only Advisor

A large number of fee-only advisors belong an organization called NAPFA The National Association of Personal Financial Advisors. Individuals can only be members of NAPFA only if they are solely financial advisors. NAPFA provides a search tool on its website that can help you find a fee-only advisor close to you.

Key Takeaways

  • Fee-only financial advisors receive payments direct from clients, and not from commissions on products they offer.
  • This type of model allows advisors to readily follow the fiduciary standard which places the interest of the client first.
  • Fees for advisors can be either hourly, percentage-based or flat or based upon simple retainer systems.
  • Don’t confuse fee-only advisers with fee-based advisors, who are still able to receive commissions on top of charges they make to you.
the authorAaron Krause

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