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Why Choosing a Fee-Only Financial Advisor Matters for Your Retirement Thumbnail

Why Choosing a Fee-Only Financial Advisor Matters for Your Retirement

Retirement

Fee only financial advisor in Dayton Ohio


Financial advisors serve a valuable role in providing guidance on important money decisions relating to retirement planning, investments, taxes, estate planning, and more. They can help optimize your savings and provide objective advice to reach your financial goals.

However, not all financial advisors are created equal when it comes to their services, expertise, ethical standards, and how they get paid. Understanding advisor compensation is key to finding one who acts in your best interests.

Fee-only financial planners are a specific type of advisor who only earn fees directly from clients and do not receive commissions or third-party payments. This compensation model minimizes financial conflicts of interest.

KEY TAKEAWAYS

  • Fee-only financial planners only earn fees paid directly by clients, not commissions or other third party compensation.
  • Benefits include unbiased advice, greater transparency, and fiduciary-level client care. But fees may be higher.
  • Fee-only planners cannot earn commissions. Their fees come from AUM percentages, hourly rates, flat fees or retainers.
  • Fee-based advisors can earn commissions in addition to charging fees directly. Fee-only advisors never accept commissions.
  • Financial advisors may earn AUM fees, hourly planning fees, retainers, membership fees, commissions, or a combination.
  • Fiduciary fee-only planners typically provide the most customized, ethical guidance aligned with your best interest.

WHAT IS A FEE-ONLY FINANCIAL ADVISOR?

Fee-only financial planners solely earn fees directly from clients for financial services rendered. They do not accept commissions, finder's fees, or any other third-party compensation. Their fees come directly and transparently from the client.

The key characteristics of fee-only financial planners include:

  • No commissions: They do not sell investment or insurance products for commissions. Their pay is not connected to particular product recommendations.
  • No revenue sharing: They do not receive kickbacks or behind-the-scenes fees from financial services companies.
  • No referral fees: They do not accept bonuses or finder's fees for referring clients to third-party service providers.
  • Fee-only compensation: The planner's fees are fully visible to and agreed upon by the client in advance. Common fee structures include hourly rates, flat project fees, or most commonly fees based on a percentage of assets under management (AUM).

This strict fee-only model minimizes financial conflicts of interest for planners. Their incentives are aligned with providing financial strategies in the client's best interest, not maximizing their own compensation.

Most fee-only financial planners are also fiduciaries. This means they are legally and ethically bound to put their clients' interests ahead of their own. Fee-only advisors focus on financial planning services like retirement planning, tax optimization, estate planning, insurance advice, college savings, and crafting an investment roadmap tailored to the client's goals and risk tolerance.

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BENEFITS OF WORKING WITH FEE-ONLY FINANCIAL PLANNERS

Fee-only financial planners offer several advantages for retirees and pre-retirees seeking professional financial guidance:

Focus on your best interest: Since fee-only planners are free from commissions or third-party payments, they avoid most financial conflicts of interest that could sway recommendations. They can provide unbiased advice to optimize your nest egg.

Greater transparency: Fee-only planners directly set and charge their fees to clients. You know exactly what you are paying and what services you are getting in return.

Objective investment selection: Without commissions or bonuses incentivizing certain investment products, fee-only advisors can make objective recommendations tailored to your needs.

Broader financial planning: Commission-based advisors tend to focus only on selling investment or insurance products. Fee-only planners usually provide comprehensive financial planning and ongoing advice.

Flexibility: The best fee-only planners craft custom solutions. They are not limited to specific proprietary products or investments that may pay them higher commissions.

Fiduciary responsibility: Most fee-only planners are fiduciaries legally bound to act in clients' best interest under the "fiduciary standard." This provides an extra layer of consumer protection.

For retirees seeking personalized, unbiased guidance, fee-only financial planners can provide tremendous value.

DISADVANTAGES OF FEE-ONLY FINANCIAL PLANNERS

However, using a fee-only financial planner also comes with some potential drawbacks:

Higher out-of-pocket costs: Paying transparent advisor fees directly may cost more than "free" advice from a commission-based broker. But commissions also have indirect costs.

Limitations on investment products: Fee-only planners cannot earn commissions on investment products. This limits recommendations to fee-based securities like no-load mutual funds and ETFs.

No insurance sales: Fee-only advisors do not sell whole life insurance, annuities, or other insurance products. This is a benefit for unbiased advice but a disadvantage for retirees preferring to buy insurance from their financial planner.

Less services for smaller accounts: Most fee-only planners work with higher net worth clients. Balance minimums around $500,000 - $1 million are common. Smaller portfolios may not get full-service attention.

The right choice comes down to aligning services with your needs and priorities. Weigh the pros and cons based on your personal situation.

HOW DO FEE-ONLY FINANCIAL PLANNERS CHARGE FEES?

Fee-only planners use several common compensation models to set their fees:

Percentage of Assets Under Management (AUM): This is the most common fee structure. Ongoing fees are calculated as a percentage of assets invested with the advisor, typically 1% - 2% per year. Fees rise or fall with the value of the portfolio.

Hourly rates: Some planners charge hourly fees, often between $150 - $400 per hour. This gives clients control over costs but can get expensive for frequent meetings.

Flat project fees: Advisors may charge a fixed, upfront cost for specific financial planning projects or money consultations. This allows certainty about costs.

Retainers: Planners may charge an ongoing annual retainer fee that provides access to services as needed. This can be more predictable than hourly billing.

Membership fees: Some planners offer services for an annual membership fee, similar to a retainer but with lower-touch services.

Higher account balances generally earn lower percentage fees while complicated family finances may require higher hourly rates. The planner's location and experience also impact fees. Be sure to get multiple quotes before selecting a fee-only advisor.

FEE-ONLY VS. FEE-BASED: WHAT'S THE DIFFERENCE?

Fee-only and fee-based sound similar but have important distinctions. Fee-based advisors can earn both fees and commissions. They may shift between charging clients fees or selling commission-based products depending on the engagement.

Fee-only advisors only earn fees paid directly by clients. They do not accept any commissions or other third-party compensation. This clear separation helps avoid conflicts of interest.

Fee-based advisors do not act as fiduciaries under the fiduciary standard. They only have to meet the lower "suitability standard" which allows sales incentives to influence recommendations. Fee-only financial planners are almost always fiduciaries putting client interests first.

TYPES OF FINANCIAL ADVISOR FEES AND COMPENSATION

Understanding advisor compensation models helps avoid confusion. Here are the main types of fees and commissions financial advisors may earn:

Asset Management Fees

  • Ongoing AUM fee percentages
  • Performance-based fees for beating benchmarks
  • Advisory fees for investment management

Financial Planning Fees

  • Hourly or per-project fees for advice
  • Ongoing retainers for consultations
  • Subscription fees for regular access to planners

Commissions

  • Upfront commission for investment products sales
  • Back-end commissions on investment redemptions
  • Trailing commissions paid over time on investments
  • Insurance commissions for various insurance products

Many advisors use a combination of AUM fees, financial planning fees, and commissions. But fee-only planners only earn fees directly from clients. You always know exactly what you are paying with transparent pricing.

HOW TO FIND AND VET FEE-ONLY FINANCIAL PLANNERS

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Finding the right fee-only financial planner takes research. Here are tips for locating and vetting advisors:

  • Use referral platforms like SmartAsset: Answer questions about your location, needs and finances to match with vetted local fee-only advisors.
  • Check the National Association of Personal Financial Advisors (NAPFA): All NAPFA members are fee-only fiduciary advisors. Search the directory for options.
  • Look for the CFP® mark: CERTIFIED FINANCIAL PLANNERS® (CFP® s) have extensive training and ethical requirements. Verify CFP status through the CFP Board.
  • Search the Garrett Planning Network: Member advisors are fee-only and take a coaching approach to financial planning.
  • Ask probing questions: Interview multiple potential planners about services, compensation, fiduciary duty, credentials, experience, specialties, client focus and more.
  • Verify fee-only status: Ask directly if the advisor is strictly fee-only. Get compensation details in writing.
  • Review qualifications: Confirm any mentioned credentials and licenses through FINRA BrokerCheck or adviser databases.

Vetting fee-only financial planners carefully from the start helps find the best fit for your specific needs and retirement goals.

Frequently Asked Questions:

Q: How much do fee-only financial planners typically charge?

A: Fees vary widely based on account size, advisor experience, services required, and location. Percentage of assets under management often ranges from 1% - 2% per year. Hourly rates run $150 - $400. Minimum account balances start around $500,000.

Q: Can I work with a fee-only planner if I don't have extensive assets?

A: Many fee-only planners do cater to higher net worth clients. But some may take on smaller portfolios, especially if the engagement is project-focused with hourly fees rather than ongoing investment management.

Q: What questions should I ask when interviewing fee-only planners?

A: Key questions include: What are your qualifications and specialties? What ongoing services do you provide? How do you charge fees and what is your estimated cost? Are you a fiduciary? Who is your typical client? How long have you been a fee-only advisor? What financial planning credentials do you hold?

Q: How can I check a planner's fee-only status?

A: Ask directly if they are strictly fee-only. Check regulatory records for any disciplinary actions. Search the NAPFA directory. Look for certifications like CFP that require disclosing compensation. Request a written explanation of how they are compensated.

Q: Is a fee-only planner also a fiduciary advisor?

A: Fiduciary status means an advisor is legally required to act in a client's best interests. While not all fiduciaries are fee-only, most fee-only financial planners do act as fiduciaries. Verify they adhere to the fiduciary standard before engaging their services.

CONCLUSION

Selecting a fee-only financial planner has many benefits for retirement investors seeking transparent, unbiased guidance. Lower costs, greater objectivity, and fiduciary-level client care give retirees confidence their nest egg is being optimized.

Still, fee-only planners are not necessarily the best fit for every situation. Consider your own needs and priorities first when choosing a financial advisor. Those wanting insurance sales or comfortable with commission-based advisors may prefer other compensation models.

The more education you have about advisor options, the better positioned you will be to make a wise choice. Knowing what fee-only financial planners provide is an important step toward successful retirement planning.

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