Simply put, a fee-only financial advisor is one who is only compensated by client fees. They do not receive commissions by selling products from insurance companies, brokerage firms, or mutual fund companies.
Fee-based advisors are usually compensated by both fees for financial advice and with commissions for financial products. Commissioned advisors are only paid through the commissions of various financial and insurance products.
Instead of commission payments, a fee-only financial advisor is paid via fee structures such as an hourly rate, a quarterly or annual fee, or with a certain percentage of your account value.
By solely representing clients, fee-only financial advisors have less conflicts of interest and are able to maintain an ideal client-advisor relationship.
A Fee-Only Financial Advisor Is Aligned with Your Interests
Take for example a fee-based advisor that manages your investment account. They earn money through both a fee and from the sale of financial products.
The advisor might earn a significantly higher commission with one investment product as compared to another. In some companies, advisors are required to sell favored products in order to remain employed.
If a fee-based or commission advisor tries to sell a particular product, is it because the product is the best fit for you? Or is it because the advisor is trying to increase their profits and remain employed?
There’s a lot of conflict of interest, and it’s hard to tell whether or not the advisor is working in your best interest in this situation.
Compare this to a fee-only financial advisor. They don’t earn commissions off product sales, so they’re in a position to recommend the absolute best solution for your specific situation.
They have no reason to push one product over another. There’s no conflict of interest and you can trust that a fee-only advisor will work for what’s best for you.
While there are many fee-based and commission advisors that do great work for their clients, eliminating these product commissions does reduce the conflict of interest between the client and the advisor.
This helps create a trusting relationship where you feel confident that the advisor is working in your best interest.
Fee-Only Planning is Transparent
It’s easy to understand exactly how your fee-only advisor is paid so you understand the exact nature of the relationship.
It’s much more difficult to determine how an advisor is incentivized to sell products. Even if you are able to determine the commission of one product over another, it’s difficult to know if there are internal guidelines for selling one product over another.
Fee-only advising is transparent and easy to understand. Not only are conflicts of interest between the advisor and client minimized, you know exactly how your advisor is compensated.
Fee-Only Planning is More Flexible
With fee-only planning, it’s much easier to switch advisors if you decide your current arrangement isn’t a good fit.
There are no surrender charges or lockup periods to stop working with a particular advisor.
You won’t have to sell investments just to move from one financial advising firm to another. If you are disappointed by the level of service or advice, it’s much easier to move on to a different firm.
A Fee-Only Advisor Emphasizes Comprehensive Advice
Emphasizing the sale of financial products is a backwards way to approach financial planning. Comprehensive wealth management is about much more than financial products.
With a fee-only financial advisor, the focus shifts from financial products to an overview of your entire financial life.
Have you ever worked with an advisor and found that the conversation kept drifting to investments or insurance? With a fee-only advisor, you can dictate the conversation topics instead of listening to a sales pitch.
The focus is on personal, comprehensive advice to achieve your financial goals.
Trust that your advisor is giving you high-quality, comprehensive advice by working with a fee-only financial advisor.
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