3 Reasons Why You Should Choose a Fee-only Financial Planner
Most financial advisors are good people with good intentions. However, financial advisors are human and are subject to biases and influences just like any other person. Understanding how your financial advisor is compensated can help you evaluate the objectivity of his or her advice.
We believe the best way to avoid biases and ensure our advice is always in our clients’ best interest is to service our clients using a fee-only advising model. We were one of the first fee-only financial planners in Milwaukee and have been members of the National Association of Personal Financial Advisors (NAPFA) since 1994. NAPFA fee-only advisors take an oath requiring advisors to:
- Act in good faith and with candor
- Be proactive in disclosing conflicts of interest
- Refuse referral fees or compensation contingent upon the purchase or sale of a financial product
When you work with a fee-only advisor, the advisor is compensated by you and you alone. Some advisors, such as broker/dealers or representatives of banks or insurance companies are paid commissions based upon the products sold. These advisors are often incentivized to sell certain products. While the investment product might provide you with good returns, do you want to know that your advisor sold you a particular mutual fund in order to win a trip? Other financial advisors are compensated using a fee-based model. Although it sounds like fee-only, fee-based financial advisors are paid using a combination of client fees and commissions.
Fee-only financial advisors are a better option for investors for three important reasons.
1. A fee-only financial advisor is a fiduciary. A fiduciary is someone who is required to act in your best interest, without regard to the interests of other parties (including themselves). Although it might seem like any well-trained and qualified financial advisor will provide you with the best possible investment advice, the reality is that most advisors are only required to meet a “suitability standard” rather than a fiduciary standard. The suitability standard simply requires the advisor to provide advice that is “suitable” to your needs, even if this advice is not the best solution. Think of Kris Kringle in Miracle on 34th Street. He advised shoppers to go to another department store when he felt it was in their best interest, even though the sale didn’t benefit his employer. That’s how a fiduciary thinks. And it’s how your financial advisor should think for you.
2. Fee-only advisors take a comprehensive approach. Because a fee-only advisor is paid by the client, the advisor’s focus is on ensuring the client has the financial ability to realize his or her life goals. Fee-only financial advisors will look at all aspects of your financial picture, including your insurance needs, career goals and post-retirement life, even your health concerns and estate planning. A comprehensive financial plan is not a jigsaw puzzle where all the pieces must fit together – it’s more like a Rubik’s Cube, where when one piece moves other pieces move as well. A fee-only advisor’s comprehensive approach will include adjustments to one part of your plan when you make changes to another or when your life’s circumstances prompt a change.
3. Fee-only advisors partner with your other advisors. A fee-only financial advisor will not try to sell you insurance or offer to prepare your taxes. Fee-only advisors will work with your insurance agent, lawyer, and CPA to ensure that they are informed and able to give you their best advice. We act in a supporting role and do not accept commissions, fees, or payments for referrals from any outside advisors. Our goal is simply to make sure you get coordinated support and the best advice from every professional service provider involved in your life.
Choosing a financial advisor is a big decision. You should be comfortable asking questions. You should understand your advisor’s qualifications. Most importantly, you should feel like you can trust your advisor to act in your best interests. To learn more about fee-only advising, NAPFA offers several consumer resources to help you make an informed decision.