Is a Fee-Only Financial Planner Right for You?

Navigating the complex world of personal finance often requires professional guidance to make informed decisions and secure a stable financial future. Financial planners play a crucial role in offering tailored advice and strategies to help individuals and families achieve their financial goals. However, not all financial planners charge their clients in the same way. 

In this article, we will delve into the three primary methods financial planners use to charge for their services: fee-only, fee-based, and sales-based. Each approach has advantages and potential drawbacks, making it essential for clients to understand the differences before selecting a financial planner that aligns with their needs and preferences.

Fee-Only Financial Planner

Fee-only financial planning has gained significant popularity in recent years due to its transparent and client-centric nature. Under this compensation model, financial planners charge clients exclusively for their services, with no financial incentives tied to the products they recommend. This approach eliminates potential conflicts of interest arising from commissions or sales-based compensation.

Advantages of Fee-Only Financial Planners

1. Unbiased Advice: Fee-only financial planners are motivated solely by their clients’ best interests, as they do not earn commissions from financial product sales. This minimizes the risk of recommending products that may not be suitable for the client’s needs.
2. Transparency: Clients are aware of the exact fees they will be charged for the financial planner’s services. This transparency helps build trust between the client and the planner.
3. Holistic Approach: Fee-only planners often provide comprehensive financial planning, focusing on long-term goals rather than quick sales. They consider various aspects of a client’s financial situation, such as retirement planning, tax strategies, estate planning, and investment management.
4. Objectivity: Fee-only planners can provide objective advice, as they are not influenced by commissions or sales targets. Clients can make more informed decisions without the worry of biased recommendations.

Potential Drawbacks of Fee-Only Financial Planners

1. Cost Psychology: Since clients pay directly for the services provided and the pricing is transparent, fee-only financial planning might give you sticker shock when you see the costs. Compared to other compensation models where the fee is less easily discernible and may come from commissions directly from your bank account. However, fee-only doesn’t necessarily mean the cost of services are any higher, in fact, they may actually be considerably lower, but it all depends on the scope of the work and the firm you are working with. The potential long-term benefits of fee-only outweigh the initial cost.
2. Limited Product Range: Fee-only planners may not offer commission-based financial products or services, which could sometimes restrict the client’s investment options. However, the fee-only financial planner can still recommend you buy them if they feel they are in your best interest. You would go about it indirectly. Often these investment options are higher priced, and the planner is doing their job in helping you save money by not offering you these investments.

Blackbird Finance Nathan Mueller, MBA, CFP®

Pagosa Springs, Colorado

Serving Clients Nationwide

We Help People of All Income Levels Accelerate Their Financial Prosperity!

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Budgeting Education Funding Financial Life Planning Getting out of Debt Retiring Early (F.I.R.E)

Fee-Based Financial Planner

Fee-based financial planning combines elements of both fee-only and sales-based compensation models. Financial planners who follow this approach charge clients a fee for their services, but they may also earn commissions or incentives from selling specific financial products they recommend.

Advantages of Fee-Based Financial Planners

1. Ample Services In-House: Clients can benefit from various financial planning services, including investment management, retirement planning, insurance recommendations, and more. A fee-only financial planner can provide all the same services, but it is rare to see insurance products directly sold by a fee-only advisor because insurance products usually have commissions.
2. Flexibility: Fee-based planners charge in a variety of ways. You may prefer that you pay an annual fee and are okay with paying some other portion of their fee from selling investment products to you. 
3. Access to Financial Professionals: Fee-based planners and Sales-based planners were more of the standard for a long time. These days we are seeing the industry moving towards fee-only planners because of the reduced conflict of interest. However, you may find more baby boomer financial advisors charging fee-based fees then Gen X and Y advisors. If you are looking for a baby boomer advisor to work with, you may have more options with a fee-based advisor.

Potential Drawbacks of Fee-Based Financial Planners

1. Conflicts of Interest: While fee-based planners aim to provide valuable advice, the potential for conflicts of interest may arise due to the commissions they earn from product sales. This could lead to recommendations that are not entirely aligned with the client’s best interests.
2. Transparency Concerns: Clients might find it challenging to discern whether a recommendation is driven by genuine need or the financial planner’s potential for commission-based earnings. Additionally, you may have a tough time figuring out an actual dollar amount as to what you are paying.

Sales-Based Financial Planner

Sales-based financial planning, also known as commission-based financial planning, involves financial planners earning a commission from selling financial products they recommend to their clients. These commissions can vary in size based on the products sold and can influence the planner’s recommendations.

Advantages of Sales-Based Financial Planners

1. Psychology of Cost: Clients may not have to pay an upfront fee for financial planning services, making it appear more affordable at the outset. However, the advisor is probably getting paid from selling you investment products or accounts where the money is directly coming out.
2. No Out-of-Pocket Fees: Clients might not need to pay fees directly for the planner’s services, as these fees are usually built into the cost of the financial products.

Potential Drawbacks of Sales-Based Financial Planners

1. Conflicts of Interest: The potential for conflicts of interest is high, as planners have a financial incentive to recommend products that might not align with the client’s best interests.
2. Limited Objectivity: Planners might prioritize selling products that generate higher commissions rather than focusing on comprehensive and unbiased financial advice.
3. Lack of Holistic Planning: Sales-based planners may concentrate more on selling individual products than creating a comprehensive financial plan tailored to the client’s needs and goals.

Other Areas You Should Consider When Selecting a Financial Planner

Understanding how a financial planner charges you is one input in selecting a financial planner. There are other things to consider in your pursuit to find the right advisor to work with. Consider the following:

• Do you want to work with a big firm or small firm? Not sure what the differences are then check out this article – Picking a Financial Advisor Big or Small?
• You will also want to consider if the advisor you are thinking of working with is a fiduciary advisor. The jargon gets confusing, so get more clarification from this article. Fiduciary Financial Advisors: Everything You Need To Know
• Next, consider credentials. A certificate such as the CFP or ChFC or a graduate degree can separate a financial planner.

Should You Select a Fee-Only Financial Planner?

Selecting the right financial planner and compensation model is a significant decision that can impact an individual’s financial well-being for years to come. Understanding the differences between fee-only, fee-based, and sales-based financial planning is crucial for making an informed choice. Fee-only planning offers transparency and unbiased advice, although it may incur a higher psychological upfront cost. Fee-based planning provides a catch-all but comes with potential conflicts of interest. Sales-based planning might seem affordable initially, but it carries the risk of biased recommendations and limited objectivity.

Ultimately, the most important aspect of choosing a financial planner is finding a professional who prioritizes your financial goals and best interests. Regardless of the compensation model, open communication, trust, and a commitment to your long-term financial success are key factors to consider when seeking professional financial guidance.

BlackBird Finance is one of the fee-only financial planning firms. They specialize in working virtually with young couples and families. They will help you articulate your financial life by covering all aspects of your financial situation in an honest and least conflict of interest way.  Learn more at www.BBFinance.co . It’s always a good idea to chat with a few fee-only financial planners before deciding, which can be found on Wealthtender.

This article reflects the insights and opinions of its author and is not a recommendation or endorsement of their views or services.

About the Author

Nathan Mueller

Nathan is an outdoor enthusiast, financial planner, and founder of BlackBird Finance. He researches and writes on personal finance, relationship finances, and young family money strategies.

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