What is a fee-only financial advisor?
Short answer: an advisor that will minimize conflicts of interest with his/her client.
Long answer: From The National Association of Professional Financial Advisors (NAPFA):
The way in which your financial planner is compensated can make all the difference in the recommendations they make for you. That’s because some advisors work under a standard that requires only that their recommendations be suitable to your particular situation. Other planners work under a fiduciary standard that requires advisors to consider what is in their client’s best interest. You may be wondering why your advisor would make a recommendation that is not in your best interest. That’s where the issue of compensation comes into play.
There are three basic ways in which financial advisors are compensated:
- Through a commission-based model
- Through a commission & fee model
- Through a fee-only model
Both commissioned and commission & fee advisors receive a compensation based on the specific financial products they sell to you. Because of the conflict of interest inherent in these transactions, these advisors may have difficulty putting the client’s interest above their own.
NAPFA’s position is that the fee-only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that your financial planner acts as a fiduciary. Fee-only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets.
Fee-only financial advisors may be paid hourly, as a retainer, as a percentage of assets (AUM), or as a flat fee, depending upon the planner you choose.
A fiduciary is someone that places the client’s best interests over their own. It's crazy that financial professionals in the U.S. aren't required to be fiduciaries but that's how it is.
A fee-only advisor doesn’t have an incentive to sell you anything. We don’t receive commissions or kickbacks. We are aligned to suggest the best product or investment for clients, not one that is merely “suitable” but may have a higher payout to the adviser and cost to the client.
This isn’t to say that the other fee structures don’t have practitioners with integrity. If they do, they will have no problem answering how they are compensated and how much they are compensated. If they act like they don’t know or don’t want to tell you, you are more than likely in a less-than-ideal situation.
Compensation does not create integrity or value. It is, however, wise to eliminate conflicts to every extent possible.
Eagle Ridge Wealth Advisors is a fee-only fiduciary firm.