When to choose a fee-only financial advisor (and when not to)
Managing fees is an important part of any investment strategy when one of the goals is maximizing returns. Working with a fee-only financial planner may appeal to you if you’re interested in getting professional advice with transparent pricing. “The most important thing to understand is the advisor’s business model and how much they’re being paid for the products and services they provide you,” says Connor Sung, manager of financial planning practice management at eMoney Advisor. Fee-based advisors can earn money from commissions or referral fees. A fee-only financial advisor, on the other hand, is only paid for the services they render. If you’re searching for your first financial advisor or your next one, consider these six pros and cons of a fee-only option.
Pro: They can offer unbiased advice.
One of the biggest advantages to using a fee-only financial advisor is that the vast majority of these professionals operate as fiduciaries, says Luis Strohmeier, partner and wealth advisor at Octavia Wealth Advisors in Los Angeles. Fiduciaries are bound to certain ethical obligations, chief of which is a duty to act in your best interest at all times. That means offering advice that’s specific to your investment goals and objectives while remaining free from potential conflicts of interest. This ties into the nature of their fee structure. With a fee-based advisor, by comparison, the fiduciary standard does not apply. So a fee-based advisor may recommend products or services to you in part because of the commission they might earn, rather than based on how well it fits into your investment strategy.
Con: There can still be room for error.
While a fee-only financial advisor is directed by the fiduciary standard, you should still consider the quality and nature of the advice you’re being given before acting on it. “A downside of fee-only advisors is that bias still exists within many of those relationships,” says Jason Laux, vice president of Synergy Group in White Oak, Pennsylvania. With that downside in mind, Laux says another potential wrinkle can occur when it comes to the way fee-only advisors approach a client’s financial plans. “There’s also the possibility that fee-only relationships may ignore simpler investment strategies even when appropriate because it decreases the value or need for their services.”
Pro: Costs can be more predictable.
Arguably, one of the biggest advantages to working with a fee-only advisor is cost. When it comes to pricing, you don’t necessarily have the gray area that you may encounter with a fee-based advisor. “The main reason for someone to choose a fee-only financial advisor is to know how much payment the advisor will receive,” says Daniel R. Hill, president of Hill Wealth Strategies in Richmond, Virginia. Fee-only financial planners and advisors can structure these fees in different ways. For example, they can charge by the hour or apply a flat annual management fee based on a percentage of client assets. This cuts out the guesswork that goes along with choosing a fee-based advisor. Hill points out that fee-only advisors may even be open to negotiating costs with clients. That said, if fees aren’t negotiable, the client still knows exactly what they’re paying, he says.
Con: They could be more costly for some investors.
Fee-only advisors can offer transparency with costs, but that doesn’t always make them an affordable option. “In order to make a living, a fee-only advisor has to rely on clients that can pay their fees,” says Strohmeier. The downside of that, says Jennifer Farrington, investment advisor representative with Cutter Financial Group in Falmouth, Massachusetts, is that fee-only advisors can prove more expensive than fee-based advisors. “This may or may not be true because commissions are often not as transparent, and that makes it difficult to determine the overall cost of running a portfolio,” she says. If you’re just starting out, a higher hourly fee or annual fee could be a barrier to entry. “If someone has only $5,000 but the fee is $1,000, it’s expensive to hire that advisor at the start and you have to pay an ongoing fee,” Strohmeier says. New investors might be better off using a robo advisor, which often charges less than the industry standard fee for human advisory services — but this trade-off means losing firsthand investment advice.
Pro: They can help create a comprehensive financial plan.
A financial advisor can aid you with implementing a plan for managing your investment portfolio. Sometimes, they can even go beyond that to meet other planning needs. Farrington says it’s important to make sure your advisor is creating a plan that encompasses different aspects of your financial life. “For example, with retirement planning, the advisor should have a system that addresses advanced tax planning, income planning, estate planning and investment planning,” she says. The success of that plan depends in part on how you approach it. Entering into a professional relationship with a fee-only financial planner or advisor wouldn’t be to your advantage if there isn’t a strong goal plan in place, Hill says.
Con: You may need to look elsewhere to meet certain planning needs.
While a fee-only financial planner can help shape your investment strategy, there may be limitations on what they can offer. “If you’re interested in working with a specialist in a certain type of product, such as insurance or annuities, it might make sense to work directly with a fee-based advisor,” Sung says. It’s also important to consider what type of relationship you want to have with an advisor before choosing a fee-only option. “Fee-only advisory services typically mean the advisor is not recommending specific products or providing any hands-on asset management,” Laux says. Instead, they give advice on overall planning and investment solutions that a client is considering. Fee-based advisors, on the other hand, tend to be more involved when managing assets in a portfolio. Whether it makes sense to choose one over the other may depend on what you want an advisor to do for you. “It boils down to paying for advice versus paying for management,” Laux says.
Six pros and cons of picking a fee-only financial advisor:
— Pro: They can offer unbiased advice.
— Con: There can still be room for error.
— Pro: Costs can be more predictable.
— Con: They could be more costly for some investors.
— Pro: They can help create a comprehensive financial plan.
— Con: You may need to look elsewhere to meet certain planning needs.
More from U.S. News
6 Pros and Cons of Choosing a Fee-Only Financial Advisor originally appeared on usnews.com