How Do Financial Advisors Get Paid?
Currently, there are only really three ways that a financial advisor can get paid for the services they offer. These models will vary and will determine largely what kind of advice you will get.
*Note that the term financial planner and financial advisor will be used interchangeably.
Commission
Commissioned advisors receive their compensation whenever they sell a financial product, whether an investment or insurance product. Some types of products that are sold with a commission are mutual funds, life insurance, and annuities. Because their compensation is largely tied to selling these products their advice is typically only tied to the product and may not be in your best interest.
Commissioned advisors were formerly held to a “suitability standard” which meant they could sell products to customers as long as the products were “suitable” for the client. However, this didn’t necessarily mean that the product were in the client’s best interest. Today, these advisors function under the new “Regulation Best Interest” rule which is the SEC’s attempt to get brokers-dealers to “act in their client’s best interest” by avoiding conflicts of interest.
Regardless, whenever the sale of a product determines compensation the possibility of conflicted interests will remain.
Fee-Only
At the Kansas City Financial Advisors Network, all of our advisors are fee-only. Fee-only advisors are held to the highest standard of care available in the industry, which requires them to put their client’s interests ahead of their own AND to openly disclose any conflicts of interest they may have. Also by operating under this standard, fee-only advisors are bound by ethical and legal obligations to put their client’s needs first. Basically, if they give you bad advice then they are held liable.
Fee-only advisors are compensated directly from their clients for the advice they provide and don’t receive any commissions, undisclosed fees, or compensation from third party agreements. Because of this you can be at peace that the advice you receive is based solely on your values, needs, and objectives.
Fee-Based
Fee-based financial advisors are a combination of both the aforementioned options. They charge fees for the financial planning and investment management they provide but they also receive commissions for selling investment or insurance products. Additionally, they might also receive commissions from third parties for referrals or other services related to their advice.
Why Should I Hire A Fee-Only Financial Planner?
Fee-only advisors are the minority within the profession right now. That means that most financial advisors out there aren’t held to the highest standard of care when providing their clients with financial advice. Most advisors are prioritizing their interests above their client’s interests, which is wrong. Are there good commissioned-based advisors out there? I’m sure. Are their bad fee-only advisors out there? Probably. However, if you want objective advice that’s in your best interest then the odds are largely in your favor by choosing a fee-only advisor.
How Do Fee-Only Financial Planners Charge Clients?
There are a few different fee models that fee-only advisors can incorporate into their practices. Advisors in the Kansas City Financial Advisors Network will utilize at least one of these options but may utilize all three. Here they are options:
Hourly
The hourly fee model is simply paying for “hours” of the advisor’s time. This model is comparable to how you would hire an attorney. This model is mostly seen with engagements that are limited in scope and nature (financial plan, check ins, projects, etc.). This typically isn’t used for ongoing service.
Assets Under Management (AUM)
This model is currently the most prevalent “fee option” in the profession for advisors managing investments. This fee is assessed as a percentage, typically around 1%, of the assets the advisors manages on behalf of the client. However, you’ll often find varying services that are included with this option based on the advisor. Finally, you will often see fee “breakpoints” which lower your overall fee percentage as your investment balance grows.
Flat Fee
This model is just as the name sounds, a flat fee. This fee is a pre-defined amount that the client pays for the service they receive. Service may range from a financial plan to a project or for ongoing service. No matter what the route, you’ll always know what you’re paying. Depending on the advisor, they may charge every client the same fee OR they may charge a fee based on the complexity of the client.
