The Benefits of a Fee-Only Financial Planner
Working with the right advisor is the single most important step you can take to ensure retirement success. Yet with so many experts, advisors and salespeople out there, it’s difficult to know just who that right professional might be. Even among CFPs®, the gold standard in the industry, there are three different types of compensation models that can affect an advisor’s motivation:
- Commission-Based Financial Planner – These planners are sales people for whom 100% of their compensation is tied to commission sales. Their incentive is to sell products. They may provide financial advice but it is likely to be geared toward fitting you into one of their products, rather than finding the product that fits your needs.
- Fee-Based Financial Planner – Fee-based planners also earn commissions but, in addition, earn a small fee from their clients. This system was intended to tie some of the advisor’s income to the client with the hope that they would worry less about commissions and more about the client’s success. However, this model does a poor job of reducing conflicts of interest, as the majority of the advisor’s income still comes from selling products.
- Fee-Only Financial Planner – 100% of the revenue earned by a Fee-Only financial planner comes from their clients. Fee-only planners do not receive any kickbacks, commissions, or compensation on the financial products they recommend. This model offers the best opportunity to limit, or eliminate, potential conflicts of interest.
A similar circumstance would be if you were buying a car. After thorough research, you decide you’d like a family-friendly car, with excellent safety ratings and within a particular budget. Your first visit is to a dealer who operates on commissions and the salesperson spends the time trying to sell you the more expensive convertible. You leave feeling disgruntled and frustrated.
Next, you visit a dealership where the salesperson shows you family cars with great safety ratings but continues to point you towards an upgraded version with a lot of features that you do not want or need. You find out later that while the salesperson does not work on commission, he receives significant bonuses for selling a certain number of these upgrades. Again, you leave the lot frustrated.
Finally, you visit a dealer and again explain what you are looking for. This time, he shows you a family car, with high safety ratings and that fits exactly into your budget. He then pulls you aside to let you know that some of these safety features will be standard in the new editions that are rolling out just next month, so if you wait a few weeks, you can likely get an even better deal on the same car. You return to that dealer a few weeks later, purchase your car and drive home happy.
As in the third scenario, Fee-Only financial planning offers objective, unbiased advice and is the best bet for aligning the interests of the client with that of the planner; leading to a happy and productive long-term relationship.