- November 24, 2021
- Posted by: timothymaceachern
- Categories: Financial Advisor, Financial Planning
Traditionally, financial advisors were paid compensation based on commissions only. This payment method often resulted in a conflict of interest. Even if the advisor was not doing it intentionally, they were subconsciously putting their interest ahead of their clients in order to maximize their commission amount.
As a result, pricing methods used by financial advisors today have evolved and include fee structures such as; hourly rates based on each session’s length, fixed fees, and/or flat fees. It can also include asset management fees that are based on a pre-agreed percentage derived from the value of the asset portfolio handled by a financial advisor.
Today, it is often advisable/recommended to go with a financial advisor that charges a flat fee. This will avoid conflict of interest and you will be sure that the financial advisor is giving you unbiased advice.
Fee-Only or Commission-Based?
Here are the most common forms of compensation for financial advisors in the market:
Charging on an hourly rate basis or a flat fee for the advisory service offered by them. They will offer limited or comprehensive advice, depending upon the engagement. The engagements may be one-time or ongoing.
Some fee-based financial advisors charge a commission based on a percentage of the assets. This is called the Assets Under Management(AUM) commission. The financial planning advice in this setup is usually limited to money management. Financial planning and other advice come secondary.
A fee-compensated advisor gets a combination of flat fees, percentage of AUM, and/or commissions. The exact share of each fee may vary. This model is known as the “fee-based” model. It allows clients to get a variety of services including financial advice, goal setting advice, and recommendations to get other major benefits.
However, there is still a debate about how “fee-only” compensation should be defined. The major conflict is on the second group that charges fees based on assets under management set-up. Generally, though, most agree, fee-only refers to payment from fixed, flat, hourly, or percentage-based fees.
Advantages of Using a Fee-Only Advisor
One of the major benefits of opting for a fee-only advisor is the freedom from biased advice and inherent conflicts that can arise when an advisor’s income is based upon selling financial products to you.
Fee-only financial advisors do not rely on commission-based products, referral fees or other forms of compensation to get paid. This way there is a lesser chance for conflicts of interest. This is why it is recommended that you should choose a fee-only financial planner.
Moreover, choosing fee-only financial planning is that your financial planner will be offering you an objective second opinion depending on the situation you are facing.
For example, if an advisor works with clients on an hourly, as-needed basis or perhaps will do a financial plan or financial review for a fixed project fee, he can offer valuable advice that is unbiased or in the best interest of his clients.
Disadvantages of Using a Fee-Only Advisor
Before you head out and choose a fee-only advisor you need to consider a few things.
The first thing you need to know is that financial professionals such as fee-only planners and advisors are costly. Their advice fees only cover the services they are providing you directly, and they will not be able to get you any other financial product.
For example, if you are going through a financial planning process with a fee-only advisor and during the process, the advisor recommends you to buy a commission-based product. If the fee-only advisor does not sell that product, you will have to get it from a third-party broker, which can increase the amount of money you are spending and add additional steps to an already complex process.
As a result, the fee-only advisor has to limit the services they offer and/or charge clients a higher compensation fee. This can be a great choice for wealthy individuals who are more than happy to pay a high fee. However, many individuals who are just starting out or with limited resources will not be able to afford a fee-only advisor.
What Does a Fee-Only Financial Advisor Cost?
The cost of working with a fee-only financial advisor can range greatly. The fee will depend on the expertise, experience, the area you live in, and the services offered by that advisor. According to Investopedia, “timed or retainer rates can run between $150 to $400 an hour”.
At Worthy Financial, we offer an affordable rate of $174/ hour, which allows many individuals to seek proper financial advice and the opportunity to work with an experienced advisor.
Why Choose A Fee-Only Financial Planner
Before you delve into the realm of financial planning, the recommended approach is to start with a fee-only planner. This will allow you to be a hundred percent sure about the service you will be getting. This way your advisor will have a fiduciary responsibility as well. You also know that they won’t have any incentives to sell you a product or service for their own gain.
Fee-only financial planners offer the most upfront payment method of financial advisors. You might think that getting good financial advice is expensive but in the long run, it will be worth it.
Consult With A Fee-Only Financial Advisor Near You
When approaching the idea of a fee-only financial advisor, you should contact a financial firm that is operating in your locality.
Worthy Financial in Halifax, Canada offers its clients the perfect blend of financial advisors and modern technology. A money coach from their organization can help you achieve financial progress by meeting with you securely online.
They provide a free initial consultation so you can get answers to financial questions about their one-on-one coaching programs. You can use the free consultation to get an idea of how a financial independence coach can help you achieve financial success.