Flat fees and commissions are the two most common compensation methods for financial consultants and planners. Instead of being paid a commission on the items they sell or trade, fee-only financial advisors pay a flat fee for their services. Is a fee-only financial advisor right for you? In addition to the positive aspects, there are some downsides. Let'sLet's take a look back.
A Fee-Only Financial Planner
Instead of earning commissions or other compensation from a company or product supplier, the adviser is compensated only by its clients. A salesman "masquerading as a counselor," as she calls them, may be avoided with this precaution.
Despite the similar-sounding term, fee-based advisers and brokers usually obtain commissions or other remuneration connected to selling financial products and collecting fees from customers. (And how financial pros earn money matters.
Fee-Only or Commission?
Financial advisers are often compensated in one of the following ways:
- There is a wide range of guidance they may give depending on the nature of the engagement. Engagements can be one-offs or continuing relationships between two parties.
- They are charging a proportion of the investment value, 1% of the AUM. Planning and other guidance, which is normally secondary to money management, may not be included in the engagement. In some cases, such as with stockbrokers, advice and planning are only nice, but in others, they are essential to the overall service (as with a financial planner).
- A mix of fixed fees, a percentage of AUM, and commissions are used to pay employees. Depending on the adviser, the actual ratios may differ. Fee-based models allow advisers to provide a larger range of services to their customers and engage closely with them to put their recommendations into action and track their results.
A Fee-Only Advisor's Benefits:
Choosing a fee-only financial adviser is one of the best ways to avoid conflicts of interest that develop when a large percentage of an advisor's revenue comes from selling financial products to their clients. For prospective clients, it is important to ask themselves:
Is this adviser looking out for my best interests, or are they just trying to make a buck? While some registered salespeople are compelled to promote their employer's products, others who earn a portion of their income from commissions may be free to recommend any items they like.
Cost-Only Advisor Drawbacks
Fee-only advisers provide several advantages, but there are also some possible drawbacks. First and foremost, fee-only advisers may cost more. For example, imagine a fee-only adviser identifies a need and advises that a client purchase a commission-based product like disability income insurance.
Additional procedures must be taken if a fee-only adviser does not offer a product, making the process much more difficult for the customer.
A Fee-Only Advisor: Where to Find One
As a leading professional association for fee-only financial advisers, NAPFA is the largest in the United States. There's a "Find an Advisor" feature on its website to help people locate an expert. You may search by zip code and then by area of expertise.
NAPFA members include everything from lone practitioners to multi-advisor companies. As a result, NAPFA members may provide a wide range of service choices, from hourly on-demand services to continuous portfolio management.
Do Fee-Only Financial Advisors Charge More?
For a fee-only financial adviser, charges vary widely based on their level of competence and years of experience and geographic location, and the services they supply. For the first construction of a complete financial plan, a flat cost of $1,500 to $3,000 is normal.
The typical hourly prices for timed or retainer services are between $150 to $400 an hour and $1,000 to $7,500 a year. On a sliding scale, those who take a portion of the assets they manage charge between 1% and 2% yearly.
What Do Commission-Based Financial Advisors Charge?
You won't pay anything to a financial advisor paid on a commission basis. They are paid a commission when you buy from them or have them sell for you. The typical commission rate for investment products and packages is between 3-6 percent.
Because the fee is deducted from the total amount invested, it "costs" you in terms of future profits. Your first-year premium payments will include product commissions (from 1 percent to 8 percent for annuities).
The Verdict
Understanding that an advisor's pay scheme isn't exclusively responsible for the quality of their recommendations is critical. However, the advice you receive may be impacted by the advisor's pay arrangement.
Pay for financial products may lead advisers to advocate those mandated by their company and those that generate the most commissions. No matter how suitable they appear, these goods may not always work best for your scenario.
