There is no shortage of investment advisors to choose from, although the sheer number of options at our disposal can make matters more daunting. Finding the right financial advisor that will act in your best interests with no conflicts of interest is paramount in meeting your financial goals and setting yourself up for a successful retirement.
Top fiduciary financial advisors are not motivated by commissions. On the contrary, they are held to a fiduciary standard and always keep their client’s best interests at the forefront of their thoughts when financial planning and constructing retirement plans.
Contact your Carolina retirement planners at TFA for any investment management or retirement questions
The difference between fee-only advisors, fee-based advisors, and commission-based advisors
When choosing a retirement planner, one of the first things you need to find out is how they are compensated. Whichever advisor you decide to work with will help you structure and ultimately manage your finances and investments. Your choice will substantially impact your investments, such as your retirement accounts.
There are three ways that financial planners typically get compensated:
- Fee-only
- Fee-based
- Commission-based
This article will explore each financial advisor compensation method in more detail:
What is a Fee-Only Financial Advisor?
Fee-only financial advisors are professionals who provide financial planning services and investment advice strictly fee-based, without receiving commissions or financial incentives from selling investment or insurance products.
This compensation structure typically includes flat fees, hourly fees, or a percentage of assets under management (AUM). The type of fee assessed is often dictated by the type of service or advice that the advisor is providing to you.
Flat fees are predetermined amounts charged for specific services, while hourly fees are based on the time the advisor spends on a specific project. AUM-based fees involve charging a percentage of the total assets managed by the advisor, which aligns the interests of both parties as the advisory fees paid rise and fall with the client’s portfolio value.
For example, if you were to hire a fee-based advisor charging a 1.5% fee to manage your portfolio of $250,000, you would pay an annual fee of $3,750. The fee is assessed quarterly from the client’s account. This fee may increase or decrease based on the portfolio’s performance. There may also be additional fees, including custodial and fees to the money managers overseeing the assets.
The fee-only model often leads to financial advisors acting as fiduciaries, which means they are legally obligated to put their client’s best interests first. This level of fiduciary responsibility is especially important to high-net-worth individuals, who typically have more complex financial situations and require comprehensive, unbiased advice.
The absence of commissions ensures that the advice provided by fee-only advisors is free from potential conflicts of interest, resulting in a transparent and trustworthy relationship. High net-worth clients, in turn, can have greater confidence in the recommendations they receive, knowing that their advisors are focused on helping them achieve their financial goals rather than selling specific products or earning commissions.
What is a Fee-Based Financial Planner?
A fee-based financial planner is a fiduciary professional who provides financial planning and investment management services to individuals, families, or businesses in exchange for a fee. These professionals have expertise in various aspects of finance, such as retirement planning, tax planning, estate planning, and insurance.
For dually registered advisors in a fee-based framework, it is still possible to earn commissions from investment recommendations, particularly when the client’s investment requirements involve more transactional elements.
The fiduciary duty ensures that the financial planner prioritizes their clients’ financial goals and objectives over their financial gain, resulting in a more transparent and trustworthy relationship between the planner and their clients.
For example, an advisor may charge a fee to manage your investment accounts but may also have their insurance license if a client needs a life insurance policy. Having the option to provide clients with certain policies or products can be done to better serve an advisor’s clients as opposed to serving their self-interests.
What is a Commission-Based Financial Advisor?
A commission-based financial advisor is compensated through commissions from the financial products they sell to clients. These products may include mutual funds, insurance policies, annuities, and other investment vehicles.
Commission-based advisors must follow the suitability standard. This is a regulatory obligation for commission-based financial advisors, requiring them to recommend investment products and strategies that align with their client’s financial objectives, risk tolerance, and overall profile. While less stringent than the fiduciary duty imposed on fee-based advisors, this standard still ensures that commission-based advisors prioritize their client’s best interests over their financial gains.
For example, if an advisor sells an annuity product with a 5% commission fee, they would receive $5,000 for every $100,000 invested by the client. This arrangement means that the more a client invests in such products, the higher the advisor’s earnings will be.
It is important to note that commission-based advisors are not obligated to provide ongoing services or support once they have sold a financial product. Their primary responsibility is to sell the product, and their compensation is tied to this transaction. In the case of the 5% annuity fee mentioned earlier, once the annuity is sold, the advisor is not required to monitor the investment, provide updates, or offer additional assistance to the client.
This may create a conflict of interest, as the advisor’s primary focus may be on generating new sales rather than ensuring the long-term success of their client’s investments. As a result, clients should be aware of these potential drawbacks when working with commission-based advisors. They may want to consider other financial professionals, such as fee-only advisors, who operate under a different compensation structure.
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The inherent benefits of fee-only advisors
There are many reasons why High-net-worth individuals should work with a fee-only financial advisor.
- Since fee-only advisors are compensated solely by the fees paid by their clients and not by commissions or incentives from selling financial products, they are committed to providing impartial guidance. This fee structure aligns the advisor’s interests with the clients, promoting long-term financial success through tailored advice and strategies that best suit each individual’s unique financial situation.
- By removing any potential conflicts of interest arising from commissions and product sales, fee-only advisors can concentrate on optimizing the growth and preservation of the client’s wealth without being swayed by external factors.
- Fee-only advisors often take a holistic approach to wealth management, addressing investment strategies and tax planning, estate planning, risk management, and retirement planning. This comprehensive approach allows clients to navigate the complex financial landscape with the guidance of an expert who understands the intricacies of managing significant wealth.
- High net-worth net individuals can better preserve their wealth, minimize taxes, and pursue a lasting legacy for themselves and their families, all while receiving impartial advice that prioritizes their best interests.
- Fee-only advisors have inherent fiduciary duties to their clients that come with the territory; they are obligated to serve their client’s best interests and have no conflicts of interest from outside brokers or companies trying to peddle their products to financial salesmen.
Finding the right advisor
The importance of employing an objective due diligence process when selecting a financial advisor cannot be overstated. While an advisor with a charismatic personality may be appealing, deciding based solely on this factor may lead to disappointment in the long run. Instead, focus on the advisor’s qualifications, experience, and credentials, as well as their fee structure and fiduciary responsibility to act in your best interest.
Relying solely on personal recommendations or referrals to financial advisors can be problematic. Your friend or family member’s financial situation may differ significantly from yours, leading to potentially unsuitable advice. Furthermore, their positive experience with a financial advisor does not guarantee expertise or success in addressing your unique financial needs and goals.
Remember, your financial future is at stake, and a thorough and unbiased evaluation process is essential to finding a trustworthy and competent professional to guide you toward your financial goals.
At TFA, we strive to be your best option for Greensboro financial planning and investment services. Contact one of our advisors today to see how we can help you meet your financial goals today.
