By Justin Pritchard, CFP®
When working with a financial advisor or financial planner, it’s crucial to work with somebody you trust and who will put your interests first. Critical financial decisions require good advice, and missteps could affect your ability to retire, fund education goals (for yourself or children), get out of debt, and provide for loved ones.
So, how do you get the guidance you need? Working with a fee-only financial advisor can help you improve your chances of getting quality advice without commissions getting in the way.
What Is a Fee-Only Financial Planner?
A fee-only advisor is typically a registered investment advisor who provides advice for a fee. Those advisors should be fiduciaries who are legally required to act in your best interests.
If that explanation leaves you confused, you’re not alone. Most consumers want the relationship described in the previous paragraph, but they don’t use that terminology when seeking advice. Some more details may help paint a richer picture.
No commissions: Fee-only advisors and planners cannot accept commissions. If you’ve had bad experiences with commissioned salespeople, this may be refreshing. Clients tend to feel more confident with advice from these advisors — they’re not just telling you what you want to hear in pursuit of a commission (and omitting essential facts). And what about kickbacks, referral fees, or other “bonus” types of compensation? Also not allowed.
When you pay for advice, fee-only planners simply provide what they think is the best advice for your situation. Their income doesn’t depend on you investing money, transferring assets, or buying a product.
Instead of taking commissions, fee-only advisors might earn a living in a variety of ways:
- Hourly fees
- Flat, per-project charges
- Assets under management fees
- Monthly, quarterly, or annual charges for work performed
The idea behind those fees is to simply charge for doing the work you want. And the fees are more directly linked to the value you receive. Instead of saying “transfer your accounts to me, and I’ll give you financial planning advice because I get a commission,” a fee-only advisor has a different value proposition. They can explain specifically what services they’re offering (retirement planning, for example) and quote a cost. As a consumer, you can choose whether or not to proceed.
Transparency: Fee-only advisors are required to explain exactly how they charge. That includes how much they bill, along with how and when you pay — plus those charges need to be clearly visible after you pay so you know what you’re paying. In addition, fee-only advisors need to explain potential conflicts of interest clearly and attempt to avoid those problems when possible.
That’s my cue to mention that I’m a fee-only financial advisor. As such, I probably have a favorable view of fee-only advisors. For about 14 years, I earned a mix of fees and commissions (trending more and more toward fees over the years), and commissioned advisors aren’t necessarily bad. But the conflicts of interest are real, and it’s harder to do the best you can for clients under those business models — no matter how much you want to help clients and provide transparency.
Conflicts of interest still may exist on this side, but they’re greatly reduced.
What Can a Fee-Only Advisor Do for You?
Fee-only planners can provide advice on virtually any topic, although some advisors steer clear of certain issues. For example, they might leave specific legal advice to estate planning attorneys, but they may be able to help you identify issues and questions that you should bring to your estate planning attorney.
Plan for goals: If you have specific goals in mind (retirement, education funding, buying a property), a financial planner can help you work toward those goals. Get advice on strategies, run some numbers and what-if scenarios, or just get feedback on your existing approach.
Evaluate your risks: Nobody can identify every potential problem or risk that may arise, but Certified Financial Planners (CFP® practitioners) have studied a variety of risk-management areas and can often help improve your position. Whether that involves a discussion on the right type of life insurance or a review of your property and casualty (auto/home) coverage, a fee-only financial advisor can often add value.
Set up a small business retirement plan: If you’re self-employed, freelancing, or you run a small business with employees, a financial advisor can review various plan designs available. Those plans may help you reduce your current taxes (or potentially save for a tax-free future), reward employees, and build liquid assets outside of your business. Retirement plans are complicated, and an experienced advisor can get you up and running quickly.
Review debts: Loans (including student debt and mortgages) are a reality for many consumers. If you need help understanding your debt, managing cash flow, or evaluating loan options, a fee-only financial planner may be able to help.
Advise on outside assets: You don’t necessarily need to transfer money to get help from a fee-only advisor. If your wealth is locked up in retirement plans, options, or other vehicles, you can still get help without generating commissions.
Are Commissions Bad?
What about commissioned advisors? Are they bad?
Not necessarily. Many commission-based advisors are honest about their compensation, they’re good at what they do, and they don’t get greedy. Again, I earned commissions for many years, although I tended to shy away from upfront commissions in favor of advisory compensation.
That said, commissions can muddy the waters. And even for the best advisors, commission-based models include fees and problems that might have nothing to do with the advisor. The advisor might not even be aware of, or benefit from, money changing hands behind the scenes based on business they place in different products. With a fee-only financial advisor, it’s easier to sidestep those issues.
From a community perspective, if you like to invest in the area you’ve chosen to live in, local fee-only financial planners may have an edge. When you pay commissions to an advisor, a portion (possibly a significant chunk) of your commission could go to a large firm in a different state. Your broker doesn’t get to keep that money or spend it in the community. With a local, fee-only practice, the money is more likely to stick around.
Fee-only advisors aren’t necessarily less-expensive than commissioned brokers. Any planner charges fees based on their experience and appetite for new clients, but you can minimize the number of fingers in the pie.
Finally, there are a few bad apples out there. As the saying goes, “when you’re a hammer, everything looks like a nail.” Some people can only earn commissions, and the desire for income may overshadow professional responsibility and decency — they’ll do what it takes to make the sale. That might even include misleading you (or telling you things that are “technically true,” but still misleading). Ultimately, when you don’t know how much you’re paying or what incentives a salesperson has, it’s easy to get taken advantage of — and some products pay incredibly high commissions to entice salespeople.
Disadvantages of Fee-Only Financial Advisors
Although I (a biased participant in this discussion) favor fee-only planners, no model is perfect.
One of the primary criticisms of fee-only advisors is that they won’t implement for you. For example, they can tell you exactly how much to invest and where to invest it, but some of them won’t invest for you. You’re a busy person, and taking that last step may be just too much. If you’re like most people, you find the account-opening and investment selection to be complicated, and you’d rather do almost anything else.
Two thoughts on that:
- Many advisors, including me, will invest your money for you — handling your accounts with little or no active involvement on your end. Alternatively, they can sit with you (online, remotely, or in person) to help you complete the steps required to put your plan into action yourself.
- You should have the choice to decide. If you want to pay somebody to handle everything for you, that’s great. You can either use a fee-only advisor who offers those services or pay a commission — it’s up to you. But if you prefer to implement yourself (or get a second opinion, with no implementation required), you should have the option to just pay for what you need.
How Much Does a Fee-Only Financial Advisor Cost?
A 2020 study from Kitces finds that the average hourly fee for a fee-only advisor is $250 in 2020 (up from$193), and the median fee is $2,500 for a one-time plan. The range goes as high as $12,000 in some cases. But advisors use a variety of fee structures, including billing asset management fees to accounts, typically at 1% for the first $1 million under management. Another study shows a median fee of $2,500 to $3,000 for an initial financial plan. Other approaches like retainers or fees based on net worth and income are increasingly popular. Advisors might receive automatic monthly payments from your bank account, or they might review your financials with you every few years to determine if a fee adjustment is warranted.
All that said, fees are all over the board. Some advisors charge flat fees in excess of $10,000 to complete projects or build a financial plan, although they typically have specialized expertise. Advisors might set pricing based on complexity, so your financial circumstances and the types of analysis you receive will determine your ultimate cost of working with an advisor.
According to the Kitces study, planners bill 10 hours (median) to complete a plan, but your planning time may vary, depending on several factors.
Where to Find a Fee-Only Financial Planner
If you’re interested in working with a fee-only fiduciary, it’s easy to find one. You might have several in your area, and some advisors work virtually — with clients nationwide (unless any state or federal rules would prevent working together). An excellent place to start is the XY Planning Network search tool, which lists only fee-only financial planners who are also Certified Financial Planner (CFP®) professionals. Full disclosure: I’m a dues-paying member, and my profile appears there. Other resources include the CFP® Board (which includes both commissioned and fee-only planners) and NAPFA.org.
Questions to ask: As you research potential advisors, interview them to learn how they work and what to expect. A few ideas to get you started include:
- What’s your background and experience working with clients like me?
- Are you a fiduciary at all times, with all clients?
- How do I pay for your services?
- How are you compensated above and beyond the fees I pay you directly?
- What topics can we talk about?
- Can you provide advice on things besides investments and just charge fees for advice?
- Do I need to transfer assets to you or invest money?
- What will I find when I look up your regulatory background and disciplinary history (through BrokerCheck or IARD)?
See a full list of questions to ask a financial advisor.