If you’re looking for a financial advisor for the first time, it’s often difficult to know where to start. A simple Internet search will often yield a multitude of different types of advisor, each trying to appeal to potential clients in several ways. Fee-only financial advisors are popular with consumers from all backgrounds. Learn how these professionals operate, and find out if this type of advisor could suit your needs.
What fee-only means
The title of a fee-only financial advisor may seem obvious, but it’s important to understand what this could actually mean to you and how much this type of service could cost.
A fee-only financial advisor makes his or her living by charging clients a set fee in exchange for his or her advice. Fee-only financial advisors generally invoice clients in one of three ways.
You might pay the fee based on:
- An agreed hourly rate
- A single agreed retainer for services
- A percentage of y our investment assets
When engaging a fee-only advisor, it’s important to clarify up-front exactly how he or she intends to charge you for professional services. Clearly, each of these methods may result in a different cost, so you should carefully consider what you want to pay and how the fee could vary according to the advice given.
For example, an hourly rate may initially seem quite low, but when you understand that the advisor will charge you this rate for all the documentation he or she works on, every telephone call made and every appointment attended, you can see how the cost could soon add up.
Bear in mind also that you will ‘see’ the fee from a fee-based advisor more than you would with his or her commission-based peers. With a fee-based advisor, you will normally need to write out a check to pay for the service you receive. However, a commission-based advisor will generally build his or her fee into an annual operating expense in a mutual fund. As such, you pay money both ways, but the psychological impact of a single fee generally feels different to a ‘hidden’ commission.
Fee-only advisors and the fiduciary standard
According to the Investment Advisors Act of 1940, investment advisors must always put their client’s interests first. This fiduciary standard means that a financial advisor can only suggest products or services that meet your personal needs, according to the information you provide. As such, financial advisors must also take necessary steps to make sure the information you give is as accurate as possible. Generally speaking, it’s up to the advisor to help you understand the financial implications of any decision you make.
Many experts believe that fee-only advisors are in a better position to adhere to the fiduciary standard because the outcome of a client consultation does not influence how much they earn. Other financial advisors work on a commission basis, which means they could earn more or less depending on the products and services they offer.
Of course, you could argue that a fee-based advisor could face similar conflicts of interest. For example, if the fee changes according to the percentage of your assets that remain under advisement, you could argue that it is in the advisor’s interests to recommend solutions that hold your assets in this way. Nonetheless, a fee-only advisor will generally have fewer potential conflicts of interest that he or she may need to disclose to you.
Finding a qualified fee-only financial advisor
In the United States, the National Association of Personal Financial Advisors (NAPFA) supports and educated fee-only financial advisors. NAPFA publishes a strict Code of Ethics that all members must adhere to, and the organization also publishes an online directory of registered advisors. If you’re looking for a qualified advisor where you live, the NAPFA website is generally the best place to look.
Other benefits of fee-only financial advisors
Fee-only financial advisors can benefit your planning needs in other ways.
For example, it’s often useful to ask a fee-only advisor for a second opinion about advice you receive somewhere else. A second opinion won’t normally take too much time, which means you can get access to valuable, impartial advice for a relatively low cost. Many people use fee-only financial advisors to ratify the information that they receive from their bank or from a commission-based financial advisor.
Fee-only financial advisors also tend to offer a wider range of services than commission-based advisors. For example, a fee-only advisor can often help you with estate planning, tax support and other forms of wealth management. Skills and experience levels vary between advisors, so make sure you find an advisor with the credentials you need.
Fee-only financial advisors help millions of Americans manage their wealth every year. Nonetheless, before you sign up for service, make sure you understand what your advisor can do, and agree in advance what he or she will charge for it.
Contact a local centre, such as the Financial Guidance Center, to see if they offer fee-based services like this.