Do you know whether your financial advisor is overcharging you? Or if the advice you get is always in your best interest? You’re not alone. In fact, 60% of investors say they don’t understand the fees they pay their advisors. That’s likely because many advisors traditionally get paid from commissions they earn on the investment products they sell you.
In recent years, there’s been a growing shift in the way Americans pay for financial advice that reduces conflicts of interest and engenders more trust. “Fee-only” financial planners are compensated solely by charging clients fees directly.
Bottom Line Personal asked Dana Anspach, CFP, president of Sensible Money, what you need to know when looking for a financial planner.
What Is a Fee-Only Financial Planner?
There are more than 325,000 financial advisors in the US. About one-third of them are fee-only financial planners. Three distinct advantages to working with a fee-only planner…
The advisor aligns with your interests
Commission-based advisors may feel pressured to recommend their firm’s proprietary products and, in some cases, are required to favor those products even if superior alternatives exist elsewhere. With a fee-only planner, you can have more confidence that his/her recommendations are based on your needs, not his compensation.
The advisor can offer more objective advice
Fee-only financial planners work under a “fiduciary” standard—they are legally and ethically obligated to put your best interests first at all times when providing financial advice, never their own.
The advisor takes a more holistic and comprehensive approach rather than just helping you invest your money
A planner assesses a client’s short- and long-term financial situation, including assets, liabilities and cash flow. He provides advice on different interconnected aspects of your financial life from taxes and estate planning to retirement planning and Social Security and Medicare optimization.
But there also are drawbacks to using a fee-only financial planner…
A fee-only planner can be more costly for some investors because he/she may charge higher upfront fees. If you have simple financial needs or limited financial activity, you may find the cost outweighs the benefits. Also, many planners have significant minimum requirements—you may have to have assets of $500,000 or more, for example—before they will take you on as a client. If you have a small account, some advisors may charge a higher fee or limit the scope of work.
You may need to look elsewhere to meet certain planning needs. Fee-only planners do not have direct access to financial products that tend to be commission-based such as specialized insurance and annuities. So you may have to work with separate professionals, such as an insurance agent, to purchase these products.
How Fee-Only Financial Planners Get Paid
There are three major fee-only compensation models…
Assets Under Management (AUM)
How it works: AUM is the most common model if your adviser is charging for actively managing your investment portfolio. This may also include a variety of investment-related services such as rebalancing your account regularly…calculating required minimum distributions (RMDs)…tax harvesting…and drawdown strategies if you need income.
Typical cost: Your fee is based on a percentage of the total dollar value of the assets managed for you. Annual fees can range from 0.75% to 1.5%, but the industry standard is 1%. Example: If you have a $1.5 million portfolio, the annual fee is $15,000. Rates often are tiered, meaning the percentage you pay may shrink as the value of your assets increase.
Advantages: You can delegate all the responsibility of investing. A planner also can provide discipline and emotional support during volatile times to help you maintain your long-term investment plan.
Disadvantages: You may be charged separately for non-investing services such as budgeting or retirement planning. While some AUM advisors include additional services in the AUM fee, others do not. It is critical to be clear on what you are getting.
Best if: You are a hands-off investor who has substantial assets and complex investment portfolios that need a lot of oversight.
Hourly
How it works: You pay only for the services you receive based on the time your planner puts in.
Typical cost: $150 to $400 per hour.
Advantages: This model is transparent and easy to understand…and flexible—you can use the planner’s services on an as-needed basis.
Disadvantages: It can be expensive if you underestimate how much help you need or if you need a more complex and comprehensive plan.
Best if: You have specific one-time financial problems and/or don’t need guidance on a regular basis. Example: You want help creating a budgeting plan to figure how to get out of debt…or you have questions about saving and paying for your child’s college education.
Flat Rate
How it works: You pay a set amount for standalone projects or for a predetermined set of services that recurs annually.
Typical cost: The cost can vary greatly from $1,000 to $10,000 depending on the complexity of the project and scope of services provided.
Advantages: Costs are predictable—you know exactly what you’re paying, which makes budgeting for financial advice easier, especially for people on a fixed income. For investment advice, it can save you money because the cost isn’t dependent on the amount of assets you have. Example: If you have a $5 million portfolio of index funds that needs limited oversight, it’s far cheaper to pay a flat rate annually than a traditional AUM fee model.
Disadvantages: Flat fees can vary greatly from firm to firm, so shop around.
Best if: You need advice for a complex problem for which an hourly fee is not cost-efficient or the hours involved could be hard to quantify, such as selling a family business. You like to be in charge of your finances—many planners will charge a flat rate for an investment plan or a retirement plan that you then implement and oversee yourself.
Mistakes to Avoid When Using a Fee-Only Planner
Mistake #1: Failing to distinguish between a “fee-only” and “fee-based” planner
Fee-based planners use a hybrid pay model that includes client fees plus commissions from selling financial products, such as insurance or mutual funds. They may abide by a fiduciary obligation when providing planning services—but they may not when they are acting in a commission-earning capacity.
Mistake #2: Not realizing you can negotiate fees
If you’re interviewing a potential advisor and the costs seem high, ask if there is any flexibility to work within your budget. Strategies: Ask if you can work with a junior member of the planning firm who charges less…research the fees of other advisors with similar services and ask for a fee match…inquire about using a different fee structure. Many planners are willing to use blended fees for certain services. Example: The planner may charge you an hourly fee for an initial consultation, then an annual fee for four quarterly check-ins…or charge you a flat fee to create an investment portfolio for you. But if you hire a planner to manage the portfolio for an AUM fee, he/she waves the initial flat fee.
Mistake #3: Overlooking investment expenses
Remember, you’re only paying the adviser for his/her advice and management of your account. It’s likely that the investments you own in your account including stocks, bonds, mutual funds and ETFs are held by an outside custodian, such as Fidelity or Schwab. The custodians may charge you their own fees such as an annual account maintenance fees, trading fees and fees for wire and electronic money transfers. You also can expect to be charged investment-management fees (also known as expense ratios) by any mutual funds and ETFs you own. Note: Your planner may get discounts on any or all of these fees that are passed on to you.
How to Find a Fee-Only Financial Planner
Search for one in your area at XYPN Planning Network. A CFP designation is the gold standard of credentials for financial planners. CFPs must have 6,000 hours of professional experience, pass rigorous exams and take a fiduciary pledge. XYPN Members must be CFPs, offer fee-only planning, and sign a fiduciary oath.
Also look at NAPFA.org, run by The National Association of Personal Financial Advisors. It lists more than 4,600 fee-only fiduciary advisors.
