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Why Should You Work With a Fee-Only Financial Advisor?
Both doctors and pharmaceutical salespeople play an important role in health care, but when you’re feeling ill you know whom you visit.
Pharmaceutical salespeople are highly trained in the benefits of the medicines that their companies sell, but they don't diagnose what ails you. That’s why you visit a doctor first — to get a diagnosis and, when warranted, a prescription.
And to protect you from the risk that a doctor might try to sell you medicine that you don’t need in order to make a profit, you buy the drugs from the pharmacist. This eliminates the potential for a huge, and medically dangerous, conflict of interest.
This same logic applies to financial planning and advice.
Another word for a fee-only financial advisor would be a NO COMMISSION advisor as a fee only advisor can only receive compensation directly from you (like a CPA or attorney) versus being paid by commissions from products they sell.
A fee-only financial advisor does not receive compensation from a brokerage firm, a mutual fund company, an insurance company, or from any other source than you.
This means they represent you and your interests when giving you advice. After all, think about where someone's paycheck comes from, and that will tell you quite a bit about where their loyalty lies.
This fee may be charged as a percentage of the assets they manage for you, and thus debited out of your account each quarter, or it could be a flat annual fee, or hourly rate.
Other financial advisors are paid at least in part by the companies whose products they recommend.
As an example, if you buy a mutual fund they suggest, a percentage of your investment will be paid to the advisor as a commission for selling that product to you. The same might be true of any stocks, insurance or other products you buy through your relationship with that advisor.
The dirty little secret is this: Different financial products pay different commissions. And the difference can be huge. (Hint: The higher risk products from lower rated companies usually pay higher commissions. But not always, so be sure to ask.)
It can sometimes be hard to figure out exactly how your financial advisor is paid, so if you’re unsure the best thing you can do is ask them directly whether or not they are fee-only.
If the answer is anything other than an immediate yes, you’ll know that at least some of their payment comes in the form of commissions.
FINANCIAL TIP: “Fee-based” is not the same thing as Fee-Only. A fee-based advisor can charge the client fees and then also receive commissions. A fee-only advisor never receives any type of commission and the fees are fully disclosed to you in dollar amounts showing on your statements.
Even though a fee only method of compensation does not eliminate all conflicts of interest it does reduce the number of conflicts and incentives to prescribe high fee financial products and investments over other less expensive ones.
However, a desirable compensation structure like fee-only does not ensure that the advisor is competent. Just like any other professional, such as a lawyer or an accountant, the knowledge and experience of fee-only financial advisors will vary.
Some advisors simply are more knowledgeable than others. Additionally some advisors may be better suited to working with clients with your unique needs than others.
For example a fee-only advisor who specializes in working with teachers and government employees nearing retirement may not be the best advisor for a high-earning 30-something professional in the private sector.
7 Things Your Fee-Only Advisor Cannot Do!
1. Predict the future.
2. Guess what you are thinking.
3. Guarantee the performance of investments.
4. Protect you from destructive financial habits that you do not address yourself.
5. Go beyond the role of advisor into the role of a therapist.
6. Magically get you as much money as you would like to have.
7. Earn higher than average returns year after year.